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No Closing Cost Home Loans in MN and WI
Advantages and Disadvantages.
Paying no closing costs for your refinance sounds great, but is it really the biggest no brainer ever? YOU DECIDE after reading this article.
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Call now for your personal
No Closing Cost Loan Quote
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O ne of the most confusing areas for consumers in a mortgage loan transaction are closing costs. Here I'll explain the advantages and disadvantages of the highly advertised "no cost" or "low cost "loans.
First and foremost, there is no such thing as a true no cost loan! Everyone knows there are costs associated with getting a mortgage loan; appraisal, credit reports, state taxes, county recording fees, title companies fees, lender fees, escrows, and more. Someone has to pay these fees, and it is always YOU. How you pay them is what this article tries to explain.
Homeowners in Minneapolis, St Paul, Duluth, Rochester, Madison, Milwaukee, and throughout all of Minnesota and Wisconsin need to understand that In a no closing cost, or no lender fee home loan, the lender simply uses "negative" points to offset your costs. In the example below, by having the 8.00% rate (versus the 7.5% rate), you can reduce (or offset through interest rate) $2,000 of closing costs. By choosing this option, it appear as if you saved thousands in closing costs. GREAT! But while lower costs always sounds good, you now have a significantly higher interest rate! 
No matter what anyone says, a no closing cost mortgage loan is NOT automatically a great deal. Although it may sound so much better than paying thousands in closing costs and fees, you have to analyze each individual loan and client situation to determine the benefits. Many lenders speak highly of the "thousands of dollars" you save in fees. They never discuss the fact that you may spend significantly more in interest over the full life of the loan than you ever saved in up-front closing costs! In the example below, you can pay $64,474 MORE in interest to save $4,000 today!
View the following chart, then call us. We'll run your personal numbers. Then you can decide if a zero cost loan is right for you.
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Deal? / No Deal? |
Always
BEST |
Most Common /
NORMAL |
OK short-term
BAD long-term
Most Common Low Cost Option |
OK short-term
Very BAD long-term |
| Considerations on a $200,000 - 30 year fixed loan |
Closing Costs Paid Out of Pocket |
Closing Costs Added to Loan |
Low Lender Fee Loan |
Full No Cost Loan |
| Loan Amount |
$200,000 |
$204,000 |
$202,000 |
$200,000 |
| Interest Rate |
7.50% |
7.50% |
8.00% |
8.75% |
| Principal & Interest Payment |
$1,398 |
$1,426 |
$1,482 |
$1,573 |
| Closing Costs On Estimate |
$4,000 |
$4,000 |
$2,000 |
$0 |
| Out of Pocket Closing Cost Paid |
$4,000 |
$0 |
$0 |
$0 |
| Interest Paid over 5 years |
$75,182 |
$76,685 |
$81,038 |
$87,830 |
| Interest Paid over 10 years |
$143,443 |
$146,311 |
$155,133 |
$168,901 |
| Interest Paid over 30 years |
$305,475 |
$311,583 |
$333,663 |
$368,474 |
FACT: In a refinance loan, the vast majority of people roll the closing costs into the new loan.
A common misconception is that a zero cost loan is better than adding thousands of dollars in closing costs to the new loan. THIS IS NOT TRUE! Even if you were to only stay in the property 5 years, why have the higher payment when a few thousand dollars added to the loan principle is meaningless (especially in todays dramatically increasing home price market).
The general fixed rate loan "no closing cost" formula is that for every 1/8th percent increase in interest rate, you can usually eliminate 1/2 percent of the loan amount in cost. So on a $100,000 loan, by increasing the interest rate 1/8th, I can reduce $500 in closing costs. By increasing the rate 1/4 percent, I would reduce closing costs by $1,000. This DOES NOT apply to ARM (adjustable rate) loans.
I hope this article has helped you to understand the varied measures used to determine the advantages and disadvantages of no closing cost loans.
Each borrower is different, and the evaluations must be made on a case-by-case basis. As you can see, there are many factors to consider when looking at all your available options. With us as your guide, we will be able to answer all of your questions, outline the costs and benefits, and even give you a few new ones to consider!
Of course, if a no closing cost refinance loan makes sense for you, we will be happy to take your application, and provide you with a loan process that is simple, stress free, and with no surprises at closing.
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