You have found the perfect home in and around Dublin, CA. You have negotiated the right price or arranged a great refinancing opportunity. Around that moment is when most people would ask, “Scott, what is the best way to structure our financing?” My answer usually is that it depends on the particular situation. One option for some borrowers is the No Closing Cost mortgage. No Closing Cost mortgages have existed in the mortgage industry for over 15 years, and they have gained popularity across the country in recent years as a result of swelling property values and rising loan amounts. Many lenders will not do a No Closing Cost Loan for loan amounts under $250,000, because smaller loans may not generate enough Yield Spread Premium to cover the costs.

No Closing Cost mortgages are billed as the perfect method for homebuyers to eradicate the pain of closing costs, but much confusion exists about how they actually work. No Closing Cost mortgages are based on higher rates than other mortgages that require borrowers to pay all the closing costs. Typically, the loans have interest rates at least 0.25 percent higher than other loans. This extra interest is reworked as a Yield Spread Premium for lenders and acts as a funding source to pay the usual and customary costs of a loan. In other words, if you want to pay less upfront, the lender will cover costs for you.

The closing costs for a $200,000 mortgage at 5%, for example, may be around $5,000. A normal mortgage will require buyers to pay these costs out of pocket. With a No Closing Cost loan, buyers will not pay any closing costs out of pocket; however, the loan rate may be raised to 5.5%, resulting in higher monthly payments for the duration of the mortgage.

When is a No Closing Cost mortgage a good idea?

• Short length of stay. If you are planning to stay in your home for only a few years, a No Closing Cost mortgage may be a great way to save money. Rather than shell out thousands of dollars upfront, this option can mean immediate ownership at a lower price.
• Refinancing. If you are looking to refinance your home to reduce your monthly payment, a no cost refinance is ideal. In fact, if interest rates continue to decline over the years, homeowners can simply refinance again and again to obtain additional savings, while avoiding closing costs with this mortgage product.

If you are looking to stay in your home for an extended period of time, the No Closing Cost mortgages may not be appropriate. A lower rate provided by normal mortgages will pay for the closing costs in time and yield a greater saving for the borrower than the No Closing Cost option.

The key is to crunch the numbers for your specific situation. No Closing Cost mortgages can provide great flexibility if you are are unsure how long you will stay in the house. Of course, every lender is different and has specific stipulations for each loan. Depending on the mortgage, you may find that a particular No Closing Cost mortgage actually requires a few fees. In some cases, the borrower may still be on the hook for the escrow fees and appraisal fees, so make sure you read every fine print.

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.