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| Sunset West Financial Inc.
DBA Amerimac Plaza West Corporate License
Identification
#01160537. Licensed through the State of California Department of
Real Estate /
DRE
License Information: 916-227-0931
Copyright 1995 Amerimac Plaza West
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No-Cost Loans Save You Money Today
Whether you are a
first time home buyer, or you are refinancing your home, the number one reason
to choose a no-cost loan is to save real dollars today. The cash required to
purchase or refinance can be a barrier for borrowers, or even prevent the
transaction entirely. In a home purchase, the additional cash required in
closing fees often whittles down the size of the purchaser's down payment or
forces the buyer to put off other necessary expenses. Those looking to refinance
want to save, not spend, money.
Under
most no-cost loan programs, the mortgage lender eliminates any or all of the
up-front loan costs. The lender generally pays for all one-time fees such as the
appraisal, credit report, title, escrow, and lender charges. These one-time
closing costs can range anywhere from $2,000 to $3,000, excluding loan points.
When points are added on top of the closing costs, the savings are even more
dramatic.
For
example, on a $150,000 home loan with 1½ points the borrower must pay $2,250 for
points. Add to that approximately $2,000 in closing costs, and the borrower has
$4,250 he or she must pay at the time of closing. A no-cost loan would eliminate
that entire u-front amount (see the No-Cost Loan Comparison).
It is
important to remember that the interest rate on a no-cost loan is typically ½ of
one percent higher than a traditional loan. However, on average, it takes seven
to ten years to recover the closing costs and truly take advantage of the lower
rates of a traditional loan. So, for the typical Californian, who refinances or
sells once every five years, the savings of the lower interest rate is rarely,
if ever, realized.
Back to Question Index.
How the No-Cost Loan Works
Often
times, borrowers will have their loans approved and closed by one mortgage firm,
and then that mortgage firm will sell that loan to an investor. This is commonly known as the “Secondary
Market.” The Secondary Market acts
as a clearing house for mortgage firms and sets the price (rate) to be paid on
the resale of loans. Loans which
have a lower interest rate than the current established price require that
points be collected with the loan.
Loans having a higher note rate than the established rate are sold at a
premium.
No-cost loans are always originated with a slightly higher interest rate,
and thus are sold at a premium.
Because they are able to receive higher prices from the resale of the
loan, the mortgage company uses that revenue to pay the closing costs for the
borrower. The result is that the
borrower lower their monthly payment and does not have to come up with cash
out-of-pocket.
Back to Question Index.
No-Cost, Fixed Rate Loans Most
Common
The
most frequently offered no-cost loans are fixed rate 15, 20 and 30 year
programs. No-cost adjustable rate
mortgages are less commonly offered, but can be found from some
lenders.
No-Cost Loans Advantageous for Refinancing or Purchases
Conventional wisdom once dictated that mortgage rates had to drop two
percentage points before borrowers would realize any real financial benefit from
the new rate. This was because it
often took years to recover the closing costs of refinancing. With the advent of no-cost loans, that
old rule of thumb is irrelevant.
There are no closing costs to recover. In fact today, many borrowers refinance
when interest rates drop as little as ¼ to 3/8 percent. Borrowers may refinance to their
advantage with no-cost loans two, three, even four times, because they do not
have to contend with closing costs.
The
absence of closing costs also help people maintain the equity levels they’ve
earned in their homes. In the past,
when borrowers refinanced their homes they often added the loan fees to the new
loan amount, rather than pay cash up front. This meant they were tapping into the
equity of their homes. This issue
too, is completely eliminated with no-cost loans.
Other
advantages can also be realized from no-fee loans in refinance situations. For example, if a borrower is in a high
loan-to-value situation, or if market values are declining, a no-cost loan can
actually be easier to get than a traditional loan. Many borrowers also choose no-cost loans
when converting from variable rate mortgages or simply switching fixed mortgage
amortization (30 to a 15 year term).
In instances where property owners wish to tap into their equity, no-cost
loans allow them to receive cash and maintain the same monthly
payment.
No-cost loans can also be advantageous in the purchase market. Many borrowers scrimp and save to buy
their first home, and typically use every cent of their hard earned savings to
make a down payment. Because there
are no closing costs to be paid under these new loan programs, the borrower is
able to stretch their down payment, making it easier to qualify for a larger
loan, and thus a higher-value property.
In
addition, borrowers opting for no-cost loans can make more cash available to
meet the lenders’ “cash reserve” requirements, as well as for buying the
“essentials” of a new home.
Back to Question Index.
Tax Issues of No-Cost Loans
With a
traditional home loan, borrowers may deduct the interest they pay on their home
and amortize points over the life of the loan. No other fees are deductible. With a
no-fee loan, borrowers are able to maintain normal mortgage interest deductions.
If a borrower refinances a traditional loan with points and takes a no-cost
loan, any points not yet collected at the time of refinance can generally be
written off at that time. However, everyone's tax situation is different. When
contemplating any major financial decision Amerimac always recommends that you
seek the advice of your tax strategist and/or attorney.
Back to Question Index.
The No-Cost Loan Comparison
Example based on $150,000 home loan:
|
Description
of Cost |
Traditional
Loan, 8.0% |
No-Cost Loan,
8.5% |
|
Non-recurring fees
Recurring fees*
1½ points
Total
out-of-pocket: |
$2,000.00
$500.00
$2,250
$4,750.00 |
-0-
500.00
-0-
500.00 |
|
Total monthly payment |
$1,100.65 |
1,153.37 |
The
results show a monthly payment on the traditional loan of $52.72 less than on
the no-cost loan, however, the difference in the cash required ($4,250) would
take 81 months – almost seven years – to recover. Taking into consideration that the
average Californian sells or refinances every five years, or 60 months, the
borrower with the no-cost loan comes out ahead by over $1,086.
*
Typically, recurring fees are costs that are ongoing, such as interest,
property/hazard insurance and property taxes. This number is an example only and will
differ based on property value.
Contact your Amerimac financing consultant today to determine the actual
costs for a loan, based on loan-to-value amount and property value, as well as
other important factors in your financing decision.
Back to Question Index.
Variations of the No-Cost Loan
Other
variations of the no-cost theme are also available from Amerimac. For example,
loans are available where the borrower may choose to pay either the fees or the
points. For those trying to realize
the dream of home ownership, these types of variations can be advantageous. For
example, if a borrower has trouble qualifying for a loan because of income,
Amerimac may recommend "step-by-step" or "buy-down" loans. Under these programs,
rather than pay the closing costs for the borrower, Amerimac uses the premium
made in the Secondary Market to initially buy-down the interest rate. This enables the borrower to qualify at
a lower rate. This type of loan
generally requires that the borrower establish a large subsidy account, but the
no-cost concept, used in conjunction with the buy-down loan, helps those who
might not otherwise qualify for a home loan.
Amerimac: Your No-Cost Loan
Experts
When
considering a real estate loan, many factors enter into the decision making
process. Let the financing experts
at Amerimac be your guide through the mortgage maze. If you’re considering a no-cost loan,
remember Amerimac wrote the book on no-cost financing!
Questions? Call
Amerimac Today!
Back to Question Index.
