No Points No Closing Costs or Zero Points Zero Points Zero Closing Costs Loans are loans that were designed to be marketed and sold. The marketing concept goes something like this: "No Points! No Closing Costs! No Hassles!". Ads for Zero-Zero loans can be found all through the Internet and the Sunday Real Estate section section of your local newspaper. They are designed to attract consumers looking to refinance their current mortgages. In reality this type of strategy is best for only a small percentage of the people who refinance their loans.
There is no great trick to Zero-Zero (0/0) loans; just remember you never get anything for free, everything usually comes with a cost and a cost free loan is no different. With a Zero-Zero program there are closing costs, they're the same as any other loan but the difference is that the lender pays them. They don't do this to be nice, they do it because they receive a higher interest rate on the loan and therefor are paid more from the investor. To the bank it doesn't matter if you pay points and closing costs or they pay it, they receive the same income either way.
Is the No Points No Closing Cost option the best option for you?
Look at the No Points-No Closing option as just one of a few options for each program. Each offering offers a lower rate as the costs increase.
|7.50% ||$0 Points & $0 Closing Costs
|7.25% ||Closing Costs only
|7.00% ||1 Point & Closing Costs
The Key to evaluating the Zero-Zero option is the same as evaluating any other option: compare the payment and the costs and determine your break-even point.
What will the loan cost you and what will the monthly payment be?
Armed with the answers you can see if the Zero-Zero is really a good program for you.
In most cases by paying points and closing costs you will make up the costs in approximately 5 years due to the lower monthly payment associated with the lower rate.
Based on a 30 year fixed rate for a $150,000 mortgage
|Option ||Rate ||Cl.Costs ||Payment
|OPTION 1- 7.50% || $0 ||$0 ||$1,048.82
|OPTION 2- 6.75% ||$,3000 (2) ||$1,700 ||$ 972.89
|Difference ||$ 3,000||$1,700||$-75.92
What program should you choose?
Your choice is either option 2, paying $4,700 in points and closing costs and obtaining a .75% discount in the rate or paying an extra $ 75.92 per month and avoiding costs with option 1.
If you divide the cost by the monthly savings we get a break-even point of 5.1 years
4700/75.92= 61.9 months divided by 12 = 5.1 years
If you plan on staying in the property more than 5.1 years you should pay the points and the closings costs. Using this strategy will save you $75.92 per month for every month you have the mortgage over 5.1 years. If you plan on staying in the property less than 5 years then the Zero-Zero option would be the most cost efficient.
This type of analysis should always be done when comparing programs.
Note For Refinancing
Paying points and closing cost doesn't mean that you have to pay the costs out of pocket. In almost all cases you have the option of rolling any costs into the loan amount. By rolling the closing costs in the loan the end result is that no single refinance option has more out of pocket expenses than any other. In most cases even with 2 points and closing costs added to your loan amount you will still have a lower monthly payment than you would receive with the Zero-Zero option.
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