You have found the perfect home in and around Dublin, CA. You have negotiated the right price or arranged a great refinancing opportunity. As I had described in my first article on the Around Dublin Blog, one option is the No Closing Cost option. No Closing Cost mortgages are also referred to as No Point No Fees loans, and they have existed in the mortgage industry for over 15 years. Before you can fully appreciate how No Closing Cost mortgages work, you have to understand that all loans have associated costs, and these costs generally fall into three different categories.

• Points are essentially pre-paid interest on a loan. They are sometimes called discount and origination fees. Discount fees are points paid to the lender who actually funds the loan and the origination fee goes to the lender or broker who processes the loan. For example one point equals 1% of the loan amount, so on a $300,000 mortgage 1 point is $3,000 and 2 points, $6,000. Simple concept.
• Non-recurring Closing Costs (NRCCs) cover appraisal, credit, title, escrow, notary, recording fees, and lender “garbage fees.” Lender “garbage fees” can include document preparation fees, underwriting fees, administration fees, processing fees and the like. Points may also be lumped into in this category. NRCCs are fees that are associated directly with obtaining the loan and are fees you would not otherwise be paying for outside of the loan process. When points are excluded from this figure, the total may also be referred to as a borrower’s base closing costs.
• Recurring Closing Costs are your current mortgage interest, property taxes, and insurance. These are fees that you would otherwise have to pay regardless of whether or not you were applying for a new loan, so you must have the money ready before your new loan can close. I strongly recommend paying these costs out of pocket, because you should already have the money to pay for these fees at the time of the loan’s closure. To do otherwise would mean financing any pro-rated interest, property taxes and homeowners insurance and incurring a huge interest expense over the duration of the new loan.

Now that the three categories of costs have been defined, we are in a better position to understand just how No Closing Cost mortgages work by comparing a No Closing Cost loan with a standard Zero Point loan. Let us assume that you are considering two options offered on a $300,000 loan. Option A is a No Closing Cost loan with a 30-year fixed rate of 6.25% and a monthly payment of $1,847. Option B is a standard Zero Point loan a 30-year fixed rate of 6.00% and a monthly payment of $1,799. The base NRCCs of Option B is $2,800. The difference in payment between the No Closing Cost Option A and the standard Zero Point Option B would be $49 per month. If you divide this difference into the base closing costs of $2,800, you will get the number of months required to recoup the costs, or break even, is 57.73 months. Divide the number of months by 12 will convert that quantity into the number of years required to break even. In this example, you would take 4.81 years to recover the costs of the Zero Point loan compared to the No Closing Cost loan. Taking the No Closing Cost Loan in this specific situation, therefore, seems to make the most sense.

Now let us compare the No Closing Cost loan to Option C, which is a loan with base closing costs as well as points. The No Closing Cost option again has a 30-year fixed rate 6.25%. Option C has a 30-year fixed rate of 5.75% at 1 point plus the base closing costs of $2,800. The payment under Option C would be $1,751 and the total NRCCs with the point would be $5,800. The payment under option A is $1,847 with the NRCCs paid by the lender or already included in the rate. The difference in payment between the No Closing Cost Option A and Option C would be $96 per month. If you divide this difference into the $5,800 in closing costs, you will see that the number of months to break even is 60.15. Divide the number of months by 12 will convert that quantity into the number of years required to break even. In this example, you would take 5.01 years to recover the costs of the new loan. Given the time value of money and the fact that a homeowner will likely refinance within 5 years, the no cost loan seems make the most sense again.

For additional information about home mortgage loans, please contact Scott Hill of American Pacific Mortgage by email at scott@scotthillteam.com or by phone (408)626-0394.