Zero Cost Loans

Closing Costs – To Show or Not To Show?

Loan Closing Costs

There are obviously costs associated with a mortgage that are necessary, but not provided directly by a mortgage lender. These include, but are not limited to:

  • Title Insurance
  • Recording
  • Appraisal
  • Wire Transfers
  • Property Inspection

Zero Cost Loans

And, ever-popular is the zero-cost loan. Frankly, any lender can offer you a zero-cost loan, but what does that actually mean? Required costs must be paid, and the lender can either show those costs or embed them into the interest rate you pay. So a zero-cost loan will not show any costs on your closing statements, but those costs will be reflected in a higher interest rate than you would have gotten had you shown and paid the closing costs differently.

Advantages and Disadvantages:

Showing Closing Costs

  • Advantages
    • You can write the amount off your taxes (Check with your accounting professional to confirm)
    • No impact to your interest rate or monthly payment
    • Brought in cash or added to loan amount, least expensive way to pay those expenses
  • Disadvantages
    • If you refinance again quickly and you pay costs twice

Zero Cost Loan (adding costs to the rate)

  • Advantages
    • If you refinance again quickly, you only lose a small portion of the initial closing costs.
  • Disadvantages
    • Added to your rate so higher monthly payment
    • Will cost an average of 20% more interest (on just the closing costs) above financing them into the loan amount.
    • You cannot write the costs off your taxes as there is no way to itemized them.

Conclusion

  • If you plan to hold a loan to term – best bet is to either pay the closing costs cash or finance them into the loan amount. Your overall cost will be lower.
  • If you plan to refinance within a year or two – better to build the costs into the rate. If you do refinance quickly you save the majority of the costs from the first refinance. And if you do not refinance and hold the loan, the difference you pay in interest on just the closing costs was likely worth the risk.
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