The Olympics are over and the medal results are final. The U.S. finished with 110 total medals. China finished with only 100 medals, but had 15 more golds than the U.S. (51-36). So, which country performed better? The U.S. with 10 more medals than China or China with 15 more golds than the U.S.? I guess it depends on how you look at it.
I get a similar question from customers on whether to pay or not pay closing costs. Which is better? Well, the answer is similar to the medal count. How do you look at it? More specifically, how does the loan fit into your specific situation? Let’s take a look at the options available in regards to closing costs.
The question of to pay or not to pay closing costs typically arises when someone looks to refinance their current home. With a refinance, there are three options to choose.
Note that the purpose of this post revolves specifically around closing costs and not prepaids or escrow accounts.
– Option 1: you could pay for the closing costs in cash at closing. This rarely occurs.
– Option 2: you could increase the loan amount to cover the closing costs. Advantages involve getting a lower rate (versus a no-closing cost loan) and no cash is needed for closing costs. The drawback to this is over the life of the loan you will pay back more from the interest on the closing costs added to the loan amount.
– Option 3: you could increase the interest rate on the mortgage in order to cover all of the closing costs. This loan is a ‘broker- or lender-paid closing cost’ option. It is more commonly known as the infamous “no closing cost loan” that you hear on the radio. In this scenario, the borrower accepts a higher-than-market interest rate to cover the closing costs. This higher rate causes the investor to pay the mortgage broker enough money to cover all of the closing costs. This means the loan does have closing costs, but they are not being directly paid by the borrower. The borrower “pays” closing costs over time through the higher interest rate. The good news is that closing costs are not paid for with cash at closing or through the loan amount. This makes the new loan amount equal to the payoff amount of the current mortgage. The bad news, the monthly payment on the new loan will be higher than the previous two options due to the higher interest rate.
Back to the question of this post, who wins – paying closing costs or not paying closing costs? The answer to the questions below should clear this up.
Note that these questions also apply when you purchase a home. The only difference being you can’t roll closing costs into the loan amount on a conventional loan. Some FHA loans allow rolling closing costs into the loan amount.
– How long to you plan to stay in the home? The length of time will determine which loan is the better option in the long run. A general rule to use is the shorter you plan to stay in the home, the more you should consider not paying closing costs, and vice-versa.
– Are you open to future refinances? If the answer is yes, you could refinance with a no-closing cost option today. When interest rates move lower, you can refinance again (either with or without closing costs) and not kick yourself for spending money on the previous refinance.
As my favorite math teacher from 7th grade always said – “clear as muddy water?” It’s like trying to decide if the America’s total medal count is better than China’s gold medal count.
um, so exactly who won the Olympics?
To really understand which options is best for you, get in touch with a mortgage consultant who review your specific situation and run numbers to determine which option is best for you. If you don’t have a reliable mortgage broker, I will be glad to give you a referral 
. By talking to a professional, you can pull the options apart and bring your refinance options into focus.
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
