Since the subprime mortgage meltdown of a few years ago, the mortgage industry has undergone numerous changes. The scandals that erupted over blatantly fraudulent practices led to stricter lending standards and more regulation that both protects and deters potential home purchasers. Now, in an effort to attract new mortgage applicants many lenders are offering a virtual smorgasbord of loan options and borrower support programs. While these variations on the traditional mortgage package may open the door to more applicants, it’s important to weigh benefits for both the short and long term. One such offering is the no-closing-cost mortgage, offered now by many major lenders.
Closing costs – services associated with arranging a loan and securing a property – can run into thousands of dollars. Those fees typically cover the loan origination itself, property appraisals, insurance and related
expenditures – a daunting expenditure for some hopeful buyers who have just barely managed to pull together a down payment. The no-closing-cost mortgage option eliminates those upfront fees. But the price you pay, in most cases, comes in the form of a higher interest rate over the term of the loan.
In some situations, a lender may simply waive the fees altogether. But in general, those costs are absorbed by a higher rate on the loan. For example prospective buyers may be offered a traditional loan with closing costs attached at a rate of 3.75% — but the rate jumps to 4.25% without closing costs. Even with a higher rate, this option may be the way to make a purchase possible
for those who don’t have the money for those costs upfront.
But real estate professionals caution that although skipping those closing costs sounds attractive, this option may make sense only if a purchaser plans to sell the property within five years or so. That’s about the time it takes to recoup the waived closing costs at the higher rates charged for this kind of loan – and that makes it somewhat less expensive than paying the closing costs upfront.
For those planning to hold onto the property for a much longer time – and this includes investors following Jason Hartman’s recommendations on income property investing – a no-closing cost mortgage may not make sense, since after the closing costs are recouped, the borrower is still stuck with a higher interest rate than a traditional mortgage would offer.
The picture is generally the same for refinancing an existing mortgage. It’s wise to consider the long view as well as the immediate issue of avoiding an upfront payout, especially if you’re planning on selling the property in the not too distant future.
Mortgage lending options may vary from lender to lender, and not all offer the no-closing-cost variety, particularly if they’re simply servicing a loan that originates with another lender such as Fannie Mae. Financial specialists recommend asking about other loan options if they aren’t offered, and weighing immediate benefits against future returns. For
heroic investors looking toward long-term gains, no closing cost mortgage options may offer only short-term relief.
The American Monetary Association Team