December 10, 2023
Many mortgage brokers and banks attempt to lure clients by touting rates that are “as low as they have been since…” And while it’s tempting to choose a lender that offers the lowest rate possible, when you add the hidden costs into the equation, your new loan may not be as attractive as it once seemed.
Closing costs can also affect your decision about when to refinance. Trying to gauge the market and predict whether interest rates have reached their low point is stressful, not to mention a game of fortunetelling that is simply too unpredictable. This adds additional anxiety to the mix, as fees often dissuade us from refinancing again should rates fall even lower.
We have addressed this issue for our clients by developing a “no closing cost” option. By adding only ¼ percent to the rate, we are able to eliminate all fees. Twenty-five basis points may seem like a lot at first, but on a $400K mortgage, it translates to only $57 in your monthly payment. In contrast, closing costs on an average $400K loan are estimated at roughly $4,500.
At $57 per month, it would take 6 1/2 years to repay the full $4,500 fee, while statistics show that the average life of a 30-year mortgage is only 3 to 5 years. Chances are that you will probably end up paying off your loan before you pay out the full $4,500 that you would spend on closing costs, which is money that you can actually be investing & growing elsewhere.
None of us, not even the most seasoned mortgage specialist, can predict which way interest rates will move in the future. A no closing cost loan allows you to hedge your bets and lower your current rate, but at the same time safeguards you in the event that interest rates fluctuate.
This strategy also empowers you to move quickly on a refinance so that you are protected in the event that rates go up. Without this provision, you may hesitate and lose the opportunity to save tens of thousands of dollars. We’ve seen this phenomenon recently; many people who were holding out for an even lower rate are kicking themselves now that rates have gone back up.
Our clients often ask us: “is now a good time to refinance?” With this option, the answer is, if you can lower your rate, then refinance. no closing costs means no risk.
For those who are uncomfortable with extending the life of their loan, our advice is to shorten it instead. Refinancing when the rates are low, while making the same monthly payment you are now, will actually enable you to trim years off your mortgage and save tens of thousands of dollars at the same time.