Franklin Financial Group Blog

Have you ever been enticed by an offer from a mortgage company quoting "No Closing Costs"?  If you think about it, that is like saying the loan is for FREE.  Just like the saying goes, Nothing is for Free!  Any loan secured by real estate involve a number of factors such as verifying credit histories, documenting income and/or assets, an appraisal of the property, and title work on the property.  Someone has to order and/or pay for these items, and real estate loans almost always involve a human element that has to review all information submitted for a loan.  That human element is a person who is being paid to review, process and/or underwrite that file. If someone quotes "No Closing Costs", the borrower typically pays for their "up front" removal of these costs somehow, usually by receiving a higher interest rate than they would have if they chose to pay for the services, or closing costs, up front. 

So, you have to ask yourself when is this "No Closing Costs" option feasible?  It is estimated that to opt for a higher interest rate to cover the costs involved with closing a real estate loan, will generally save a borrower money within the initial first four to five years on a loan, or what I like to call the "break even point."  The "break even point" can easily be calculated.  Find out what your payment would be if you paid for the closing costs up front which should result in a lower interest rate.  Then compare that to the payment if you take a higher interest rate and in essence "finance" those closing costs into your loan.  Now divide the total closing costs you would pay up front, by the difference in the monthly payments.  The result is the number of months it will take to "break even" on the decision to take the higher interest rate and no closing costs option.  If you believe you will be in that loan for that "break even" number of months, or if you believe you will sell the property on or before those number of months pass, then it makes sense to take the higher interest rate and not pay for the closing costs up front.  If you believe you will be in the property or will not refinance the loan before the "break even point" then you should opt to pay the closing costs up front and reap the rewards of a lower interest rate over a longer period of time. 

Remember, if something sounds too good to be true, it usually is. Also, you get what you pay for.  Knowing all the facts is half the battle to make the best and most informed financial decision.