No-cost loans and how they work

How can people do a no-cost loan, there must be a gimmick. No cost loans are they for real? True No fee loans or true no cost loans are done by many mortgage brokers, banks, mortgage lenders. When you borrow money you usually have to pay appraisal fees, title insurance, title closing costs, bank processing fees, flood insurance checking. These fees add up to $1200 -$2500 depending on the bank and the size of the loan. So how can somebody do a no cost loan?
Here is how they work. Loan officers, banks, mortgage brokers make more money the higher the rate they sell you. For example at 4% they may make get 1% of the loan amount. So at 4.25% they may make 1.4% of the loan amount and at 4.65% they may make 2% of the loan amount.
So lets use the example above on a $200,000 loan. If your Michigan mortgage person does a 4% loan for you they make 1% of $200,000 or $2000 that is split between the company for overhead and the mortgage person.
Now if you have $2000 in closing costs they can give you a rate of 4.65%. They make 2% of $200,000 or $4000. They take $2000 of that money to pay the closing costs out of their pocket. That is how a no cost loan works. It is also how one bank or mortgage broker may have lower closing costs than somebody else. They are taking some of their commission to pay your closing costs.
Is it worth doing a no cost loan? Let's say you have a 5 1/8% loan on $200,000 with a payment of $1088.97 a month that you got last year. Your mortgage person offers you a 4.65% no cost loan with a payment of $1031.27 that does not cost you a dime or raise your mortgagebalance. You save $57.70 a month! You would save $20,772 over the life of the loan. It is a no brainer.
But let me play the devils advocate here. Why wouldn't you do the 4% loan? I this case I would if I had the $2000 in closing costs and I did not have to roll it in. The payment on 4% is $954.83 a savings of $123.04 a month which means it would take 16 1/2 months to break even. Are you going to stay in the house for over 16.5 months. Then it would be worthwhile to do the lower 4%. The payback time is different for every loan and every percentage rate.
You have to work the numbers when offered a no cost loan. Ask your mortgage person for the full fee loan too. Then make a decision after you run both payments and figure the payback time. Many times it is not worth it to refinance but it might make sense to reduce your payment if it does not cost you a dime.
For more on Michigan mortgages, credit scoring, and Michigan real estate feel free to go to my website www.russravary.com Have a great day!!! Russ Ravary