A no-cost mortgage will have no lender fees plus can cover other mandatory 3rd party fees such as title insurance fees, recording fees and escrow set-up. In order to avoid these costs, a credit(rebate) can be applied to your new loan. If a credit is not applied, the closing costs will be added to your new loan or you will need to pay for them at closing.
Example of a lender credit: $200,000 loan amount
What Costs Can The Credit Cover?
Title Insurance » Cost will range between $600 to $2500 depending on loan amount and loan type.
Loan Processing Fee(Lender Fee) » Will range between $250 to $800
Escrow » Escrow setup can be as little as $500 for a refinance up to a few thousand dollars if you’re purchasing a home. Learn more about Colorado property taxes here.
Underwriting Fee(Lender Fee) » Will typically range between $300 to $1,000 depending on loan program and lender. This fee is usually discounted on government streamline programs.
County recording/Flood certification/Tax certification » These fees should never exceed $250 if purchasing or refinancing in Colorado.
Up-front mortgage insurance/VA funding fee » Can range between zero up to 3.3% of your loan amount depending on loan program and loan type.
Misc. lender fees » Can be origination fees, discount points, administration fees, other junk fees.
Simple Example Of A No-Cost Loan
Title Insurance $950(3rd Party Fee-mandatory)
Underwriting Fee $795(Lender Fee)
Recording Fee $120(3rd Party Fee-mandatory)
Escrow Set up $800(Property Taxes & Homeowners insurance)
In this scenario, you may receive a credit to cover all of the costs above. You can even use the credit to pay for one month’s mortgage payment as well. Keep in mind that your rate may be affected as the rebate rises.
How To Shop For A No-CosMortgage
The Good faith estimate is a document that will help you compare different offers from lenders. All lenders are required by law to provide you with this document within 3 days of your application. Please pay close attention to the “Adjusted origination charge” on page 2 of the good faith estimate. In order for a loan to be a no-cost loan, the adjusted origination charge must be ZERO or a negative number. If the number is closer to zero, this means the lender is not charging you any lender fees BUT you will still be responsible for all the 3rd party costs above. If the adjusted origination charge is a negative number(credit), you can use that money to cover 3rd party fees such as title insurance, etc. If the number is a positive number, then you’re not being offered a no-cost loan.
Is Doing A No-Cost Mortgage A Good Idea And What’s The Point
Absolutely! The goal is to maintain more equity in your home and avoid adding closing costs to your loan. For example, let’s say you have a $200,000 loan amount and a lender offers you 3.75% interest rate with 3k in closing costs. Another lender offers you 4% with no closing costs. Which offer is better? Well it all depends on how long you’re planning on keeping your home. The difference in monthly payment between 3.75% and 4% will be about $35 per month. So how long will it take to recoup your 3k in closing costs? $3,000 divided by $35 per month savings = You can do the math but it’s about 90 months or roughly 7.5 years. That’s right, it will take you 7.5 years of $35 monthly savings to recoup your equity.
On the other hand, if you’re planning on staying in the home for 12 or more years, it can be beneficial to take the lower rate because eventually it will pay off. Please contact us if you need advice or would like a loan quote.