Closing cost considerations and options
There are various ways to treat closing costs when refinancing your home. In a no-closing-cost refinance, the lender gives a credit to cover the closing cost, but offers a slightly higher interest rate. Alternatively, consider paying closing costs out of pocket for a more favorable interest rate. Or, if your situation warrants it, add closing costs to the new loan amount.
An example: Comparing closing cost options.
Hypothetically, imagine refinancing a $600,000 property with a first and second mortgage. Assume your current monthly payments are $4,201. You contact your Guarantee Mortgage Loan Advisor to find out if it would be worthwhile for you to refinance.
After considering your credit score, your debt-to-income ratio, the appraised value of your home, and your home equity, your Advisor says you qualify for a *30-year fixed rate mortgage with three options for closing costs.
The following chart compares these hypothetical options.
|Option 1||Option 2||Option 3|
|Pay closing costs|
|Add closing costs|
to the loan
|New monthly mortgage payment||$3,040||$3,085||$3,061|
|Total of current payments||$4,201||$4,201||$4,201|
|Months to break even||3.5||0||3.56|
*NOTE: Rates reflected here are for illustration purposes only. Rate and points are subject to change without notice.
If you choose Option 1, Your interest rate will be 4.5%* and you’ll pay $4,059 in closing costs out of pocket. Your monthly payment will be $3,040, and you’ll save $1,161 each month. If you were to keep the new loan for 30 years, you’d pay $494,440 in interest over the life of the loan. Add the $4,059 you paid out of pocket up front, and the total cost of your loan becomes $497,480.
Now, compare Option 1 to Option 2. The monthly payment difference is $45. You’d have to keep the loan for a minimum of 90 months, or about 7.5 years, before realizing the extra $45 per month savings (divide the $4,059 closing costs by $45 per month savings to arrive at 90 months).
If you choose Option 2, your interest rate will be 4.625%*. You’ll pay no cash out of pocket. You’ll also save $1,116 per month over what you’re paying on your mortgage now. And if you were to keep the loan for 30 years, you’d pay a total of $510,564 in costs.
If you choose Option 3, your interest rate will be 4.5%*, and you’ll pay $4,059 in closing costs, just as in Option 1. The difference? You’d be financing the closing costs, which means you won’t pay cash out of pocket. If you were to keep the loan for its life, you’d pay $497,785 in interest. Comparing Option 3 to Option 1, you’d pay $21 more each month, but you wouldn’t have to pay the $4,059 in closing costs up front.
Which closing cost option makes the most sense?
All else being equal, Options 1 and 3 make the most sense if you plan to stay in the property for more than 7.5 years. If you plan to stay in the home for fewer years, Option 2 may be preferable.
Although your final choice would depend on your goals, all of the options put extra cash into your pocket each month. Your Guarantee Loan Advisor will help you compare terms, including monthly payment and breakeven differences, so you can decide which “refinance with no closing costs” scenario works for you.
Why wait another month? Find out how much you can save today!
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