The Short Course: The shorter period of time you will have the loan, the less money in up-front costs you want to pay. The longer period of time you will have the loan, the more in up front costs you should consider paying. Why? You want to keep your UP-FRONT COSTS DOWN if you will not be keeping the loan long-term. Think of it like renting the money vs. owning the money.
$200,000 Loan
$0.00 Closing Costs
10% Rate
You keep the loan for 30 days and then sell the house and pay off the loan. Your Loan cost is limited to the interest for 30 days. In this example it would have been $1666.67
Same $200,000 Loan
$3000.00 Closing Costs
6% Rate
You also only keep this loan for 30 days, and then sell the house and pay off the loan. Your loan cost is the interest for 30 days ($1000.00), and the $3000 in Closing Costs for a total of $4000.00
It’s easy to see in the example above that the No Closing Cost Loan was the best choice. Apply the same process when deciding on the best loan structure for you. Ask yourself:
How long will I be in the home? And how long will I need this loan?
And remember, rates and closing costs go hand in hand. The more up front costs you pay, the lower your rate will be. The lower in up-front costs you pay, the higher your rate will be.
At Fairway Independent Mortgage Corporation, all our initial rate quotes are based on a Zero and Zero Platform: Zero Origination Fees Zero Discount Points. Both items – Origination Fees, and Discount Points, are pre-paid interest by you, the borrower. A 1% origination fee, or 1% Discount Point, ($2000.00 in our example above) is typically worth a .25% lower rate. If you do the math, it could take 4 to 5 years just to break-even on the up front costs.
$200,000 Loan Amount $200,000 Loan Amount
$2500 In Closing Costs $2500 In Closing Costs
$ 0.00 In Point $2000 In Points
6.75% Rate 6.5% Rate
$1297.20 P&I Payment $1264.14 P&I Payment
The Extra $2000.00 in Costs saved you $33.06 per month, but just to get your $2000 in Points covered, you must keep the loan for a minimum of 5 years.
FNMA & HUD statistics show that a homeowner, in all likelihood, will not keep a loan longer the 5.1 years; either because they are moving or refinancing. If that is the case & you don’t know for certain, err on the side of caution. Be careful when getting quotes, because most lenders don’t call their Origination Fee “Points”. And remember…
Higher Costs = Lower Rates Lower Costs = Higher Rates
No Closing Costs = the Highest Rate
