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rated:
Just wanted to pick the mind of Fatwallet.
So i was looking on Aimloan regarding a mortgage for $350,000. Here are the rates and monthly P&I
Rate APR Points Closing Costs Payment
3.750% 3.796% 0.000% $4,841.75 $1,620.90
3.875% 3.921% 0.000% $2,643.75 $1,645.83
4.000% 4.047% 0.000% $375.75 $1,670.95
4.125% 4.172% 0.000% $0.00 $1,696.27

As per the above table it looks like the company is capturing the cost of closing by increasing the loan rate.
The line item that is different is Lenders credit.
Is Lenders credit another  name for origination fee.?
Most banks seem to show either 4% with high closing cost or 4.125% for low fee or no fee mortgage rate.

Mathematically it looks like paying the higher closing cost would lower the cost over the life of the loan. Is this true?
Is this the right way to look at it?

Where else can these mortgage companies trick you?

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No last minute surprises before closing?

Yoksel (May. 15, 2017 @ 5:06p) |

It doesn't matter that you haven't heard of them, you can read reviews or search for them right here on FWF. I suspect t... (more)

scripta (May. 16, 2017 @ 10:38a) |

Exactly. In the time before zillow I too looked at box, aimloans, and amerisave, as they were frequently mentioned and h... (more)

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rated:
If you feel that rates will only go up, get the lowest rate. If you think rates might go down again, get no closing costs and refinance anytime the rate goes down 1/8 of a point. I knew people who refinanced multiple times in a year when the rates went down.

rated:
henry33 said:   If you feel that rates will only go up, get the lowest rate. If you think rates might go down again, get no closing costs and refinance anytime the rate goes down 1/8 of a point. I knew people who refinanced multiple times in a year when the rates went down.
  
This. Times ten.

rated:
Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?

rated:
Yoksel said:   Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?
I would think so

rated:
qcumber98 said:   Yoksel said:   Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?
I would think so

Title transfer taxes and owners title insurance would be lower. Lender's title insurance lower based on your balance.

rated:
Yoksel said:   Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?
Yes, there will be an origination fee, processing fee, appraisal fee (unless it's really low LTV), etc. But if you opt to get a higher rate than what you should be getting, the lender will give you a $ credit towards these closing costs. In OP's table, taking the 4% rate will mean a closing cost of only $375. Given that every .125% meant around $2200 credit, getting the 4.125% rate should mean that the lender should pay OP ~$1800+ or have that go towards the initial funding of an escrow account (if any). I don't know why Aimloan would show $0 instead of a credit, and if that is really the case then OP should either take 4% or go to another lender that will actually refund you the credit. So if OP got the 4% rate and only paid $375, if the no cost rate goes down to 3.75% or 3.875% in the future, then he can refinance again with little cash out.

rated:
anthonyu said:   
Yoksel said:   Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?
Yes, there will be an origination fee, processing fee, appraisal fee (unless it's really low LTV), etc. But if you opt to get a higher rate than what you should be getting, the lender will give you a $ credit towards these closing costs. In OP's table, taking the 4% rate will mean a closing cost of only $375. Given that every .125% meant around $2200 credit, getting the 4.125% rate should mean that the lender should pay OP ~$1800+ or have that go towards the initial funding of an escrow account (if any). I don't know why Aimloan would show $0 instead of a credit, and if that is really the case then OP should either take 4% or go to another lender that will actually refund you the credit. So if OP got the 4% rate and only paid $375, if the no cost rate goes down to 3.75% or 3.875% in the future, then he can refinance again with little cash out.

  Ok. The above explanation is why I asked the question.
Lot of folks here think getting a low cost or no cost closing is better.

I did more number crunching.
 
  4%
 
3.875%
 
3.75%
 
till term
 
$5,890
 
$11,744
 
$17,561
 
4yrs
 
$1,592
 
$3,184
 
$4,772
 

The above table shows the dollar difference in interest payment between getting a 4.125% loan versus respective rates.
First row contains the if the loan is held to 30yrs and amount shown is how much lower interest one will pay.
Second row is when the loan is held for 4yrs.

Seems to be paying the higher closing cost is much better choice, if you plan to be with the loan for at least 4yrs.
Con : if people are going to refinance immediately.

Am I missing something obvious?

rated:
Looks to me like you're thinking is on point. As was mentioned previously, you take the higher rate/lower cost option if you think rates will drop and you'll refi again (soon or before the break-even point on the costs vs. add'l interest paid). If you do not think the rates will drop and that this will be the final mortgage on your home, you pay the costs and get the lowest rate. That's basically what I did went I refi'd my home this past year for 15yr @ 2.75%. As far as I'm concerned, this is my last mortgage. No plans to move from this house and I don't think I'll ever beat that rate enough to refi again. In about 14 years I'll be mortgage free, or that's the plan anyway.

It's all a gamble.  You have to do what you're comfortable with given the data that you have.  Going with the higher rate/low costs is less risky (assuming of course that this rate is still better than your current rate) up front, but more risky later (if you don't/can'r refi into something lower and you end up paying more in the long run).  The lower rate/higher costs is more risky up front, but cheaper in the long run.  You can also shoot the middle and balance out the risk a little, but I don't think that's particularly smart.  You'd only do that if you are strapped for cash and really want the low rate/high cost option but don't have the funds to pay the costs.

rated:
javaman2003 said:   
Am I missing something obvious?

You need to add any and all closing costs to the numbers for "interest" in your table. If you sell or refinance then those closing costs that were rolled into the loan will need to be "paid". At four years the no closing costs should always be better. If held for 30yrs and no refinance, then some rate buydown will have lower total costs.  The 3.75 plus closing costs coming out near zero is weird, but some lenders charge a lot for negative cost loans which may be making it breakeven at 4 years.

8-10yrs (depending if opportunity costs/deductibility were considered) was the break-even for the first couple rate steps from negative cost when i compared when I last refinanced.  Buying down the rate past the first couple notches is usually more expensive, with 15+ years break-even.

rated:
If you're not looking at actual GFEs in my experience the closing costs are underestimated for online quick quotes. Things like daily interest charges, anything consumables you might have to reimburse a seller for and you may need to upfront fund the Escrow account (if you escrow) to the tune of $2k or $3k. The escrow isn't a closing "cost" but it will come out of your pocket. Something to keep in mind should you be tight on funds.

rated:
javaman2003 said:   
I did more number crunching.
 

  4%
 
3.875%
 
3.75%
 
till term
 
$5,890
 
$11,744
 
$17,561
 
4yrs
 
$1,592
 
$3,184
 
$4,772
 

The above table shows the dollar difference in interest payment between getting a 4.125% loan versus respective rates.
First row contains the if the loan is held to 30yrs and amount shown is how much lower interest one will pay.
Second row is when the loan is held for 4yrs.

Am I missing something obvious?


Your numbers are off?  The difference between 4.125 and 3.75 is $76/month, and there are 48 months in 4 years = $3648 - $4800 in closing costs = -$1200.  Breakeven is closer to 5.25 years.
The 4% rate is the best deal.  Breakeven is only 14 months over 4.125%.

EDIT: Nevermind, I need to look at an amortization table to see the difference in equity.

rated:
elektronic said:   
qcumber98 said:   
Yoksel said:   Might be a stupid question from someone who never had a mortgage but wouldn't refinance require another set of closing costs?
I would think so

Title transfer taxes and owners title insurance would be lower. Lender's title insurance lower based on your balance.

  
There's always closing costs, but the point your missing is that when you select the higher rate, you get a credit which pays off your closing costs. Hence no closing costs. But you pay more in interest. But it allows you to refinance any time rates go down. They did go up earlier and now they're down again. For maximum effect, use a 5 year ARM. those have lower rates than a fixed 30. Only works if interest stays low. 

rated:
I'm not missing that. No closing cost loans only work if interest rates are dropping, doesn't matter if they are low or high.

rated:
elektronic said:   I'm not missing that. No closing cost loans only work if interest rates are dropping, doesn't matter if they are low or high.
  Correction: they are beneficial if rates might drop OR if you are likely to sell in under 5-10years.

rated:
First, have you checked Zillow mortgage marketplace? In my experience the best rates/fees there are lower than aimloan.

Second, the unadjusted break-even period on fees is usually between 4.5 and 9 years (in my experience). Longer once you account for inflation, and even longer if you account for opportunity cost.

To address one of the comments above -- refinancing $350K when the rate drops just 1/8th probably does not make sense due to fees. I'd guess it needs to be at least a quarter. 1/8th might make sense for higher amounts.

rated:
scripta said:   First, have you checked Zillow mortgage marketplace? In my experience the best rates/fees there are lower than aimloan.

Second, the unadjusted break-even period on fees is usually between 4.5 and 9 years (in my experience). Longer once you account for inflation, and even longer if you account for opportunity cost.

To address one of the comments above -- refinancing $350K when the rate drops just 1/8th probably does not make sense due to fees. I'd guess it needs to be at least a quarter. 1/8th might make sense for higher amounts.

  
The standard phrase for that type of load is called a no closing cost loan. Therefore a true no closing cost loan makes sense to refinance because there are no closing costs. All fees are covered by the slightly higher interest rate. The savings might not seem like it's worth it, but you will still save money.

rated:
henry33 said:   
scripta said:   First, have you checked Zillow mortgage marketplace? In my experience the best rates/fees there are lower than aimloan.

Second, the unadjusted break-even period on fees is usually between 4.5 and 9 years (in my experience). Longer once you account for inflation, and even longer if you account for opportunity cost.

To address one of the comments above -- refinancing $350K when the rate drops just 1/8th probably does not make sense due to fees. I'd guess it needs to be at least a quarter. 1/8th might make sense for higher amounts.

  
The standard phrase for that type of load is called a no closing cost loan. Therefore a true no closing cost loan makes sense to refinance because there are no closing costs. All fees are covered by the slightly higher interest rate. The savings might not seem like it's worth it, but you will still save money.

  And you can possibly find slightly negative cost rates (cover more than closing costs).  My lender would only allow credits up to $0 estimated closing costs (Not including prepaids which are paid out of escrow but not a "cost" of the loan.  In my case the estimates assumed a 5yr discount rate on title insurance (and there's a better 2yr rate, so this difference brought my costs down and created overage.  Rates on the title policy itself are regulated in this state so the same everywhere --unfortunately higher than every other state though.  Plus i negotiated $300 off from lender's preferred title co for settlement services.  On the last refi I lucked out and got a slightly larger credit. They accidentally didn't automatically lock the loan when the lock was sent in so the loan officer provided a manual adjustment credit to make the different days' rate tables equal.  Then I got an appraisal at 75 LTV instead of 80 and a portion of this added to overages because the manual adjustment wasn't bound by the $0 closing cost cap, so i got a portion of the 75LTV points difference back.  Original finance was negative ~$1100, refi #1 was -$800, refi #2 was -$1000.  These amounts applies to my escrow funding.  Average of around -0.7% pr -0.7 points after covering all closing costs for each mortgage).
  
I don't expect to be able to refi again any time soon.  But I do have a lower rate than if I'd paid ~$10k closing costs initially plus they paid me $3k total through the 3 originations ending 13 months after purchaser.

rated:
To me, paying high closing costs or points is a way of timing the mortgage rate market (in addition to making a bet on not having another reason to refinance in the next few years). I don't think it's a wise choice. I'm not a gambler - even without knowing that low costs and frequent refinancing has worked very well for a couple of decades, I think I'd be very comfortable if rates had jumped and stayed higher at some point. I expect to stick with it even though it (again) looks like this era of sustained low rates is ending. Maybe no more opportunistic refinancing, but I've got one ARM that unlocks in 3+ years, or may buy a new home by that time.

rated:
SlimTim said:   To me, paying high closing costs or points is a way of timing the mortgage rate market (in addition to making a bet on not having another reason to refinance in the next few years). I don't think it's a wise choice. I'm not a gambler -
 

  
How is paying the cost gambling?
The minute you take on the mortgage you have gambled. We are all mortage rate takers. Only question is how are you dealing with the closing cost? if you pay closing costs upfront, you save money slowly overtime. If you do no cost closing, you pay higher interest.

When i did the math i was surprised by how much the savings was. Those interest difference numbers I posted is actually discounted at 4.125%.
 

rated:
Bend3r said:   
 

  Bend3r,
    Who did you use for your mortgage? I am leaning towards 30yrs. My thought is rates are historically low, why not lock it for 30yrs.

rated:
javaman2003 said:   How is paying the cost gambling?Because if the rates drop and you refinance before those costs have paid for themselves (which takes years as I explained above), you lose money.

javaman2003 said:   When i did the math i was surprised by how much the savings was. Those interest difference numbers I posted is actually discounted at 4.125%.I don't know what math you did, but as I already mentioned the break-even is usually 4.5-9 years.

Here's how I calculate break-even using the numbers in your original post. Difference between 3.75% and 3.875% = $2198 (difference in closing costs) / $24.93 (difference in monthly payment) = 88.16 months (7.3 years) break-even WITHOUT accounting for inflation or opportunity cost. Similarly, the difference between 3.875% and 4% is 90.28 mo, and between 3.75% and 4% is 89.23 mo. The difference between 4% and 4.125% is only 14.84 months, but this is because given the closing cost of $375.75 at 4%, your closing cost at 4.125% should be negative (approx -$1892). The lender appears to be pocketing it instead of giving it to you as credit. Given those choices I would take the 4%.

Once again, have you checked the zillow mortgage marketplace?

rated:
Good point by scripta that was unmentioned because it should be obvious. If the zero cost rate is only a small cost difference from the next rate step, then the next rate step is what to compare as zero cost. Many lenders cap the credit at the estimated zero closing cost amount. Otherwise you would be incentivized to refinance every month and pocket $1000s every month, because early payoff penalties are abnormal. And they'd be hit with chargebacks because the loan was not held for at least 6 months.  (Does anyone have early payoff penalties other than penfed? They're the only one I've noticed with early payoff penalties on their 5/5 when closing costs are included)

rated:
javaman2003 said:   Just wanted to pick the mind of Fatwallet.
So i was looking on Aimloan regarding a mortgage for $350,000. Here are the rates and monthly P&I

Rate APR Points Closing Costs Payment
3.750% 3.796% 0.000% $4,841.75 $1,620.90
3.875% 3.921% 0.000% $2,643.75 $1,645.83
4.000% 4.047% 0.000% $375.75 $1,670.95
4.125% 4.172% 0.000% $0.00 $1,696.27

 

  
I think if you can roll the closing costs into the loan, your calculation would be a bit different - run the amortization calculation for 350,000 at 4.125% then at 354,841.75 at 3.75%. Otherwise, if it's not rolled in, you want to take into account the amount that $4,841.75 grows into over 30 years at X% returns (had you invested it instead).

rated:
scripta said:   
Here's how I calculate break-even using the numbers in your original post. Difference between 3.75% and 3.875% = $2198 (difference in closing costs) / $24.93 (difference in monthly payment) = 88.16 months (7.3 years) break-even WITHOUT accounting for inflation or opportunity cost. Similarly, the difference between 3.875% and 4% is 90.28 mo, and between 3.75% and 4% is 89.23 mo. The difference between 4% and 4.125% is only 14.84 months, but this is because given the closing cost of $375.75 at 4%, your closing cost at 4.125% should be negative (approx -$1892). The lender appears to be pocketing it instead of giving it to you as credit. Given those choices I would take the 4%.

Once again, have you checked the zillow mortgage marketplace?

  Thanks for giving detailed explanation for your thoughts. I was wondering why you kept saying 7yrs.

  I thought the monthly payment involved both principal and interest. I am basing my calculation by doing the full amortization.

For eg., interest calculation for just first month alone:
 
4.125%
 
4%
 
3.875%
 
3.75%
 
$1,203.13
 
$1,166.67
 
$1,130.21
 
$1,093.75
 

Difference in interest turns out to be $36.46, $73.92 and $109.38. So breakeven is closer to 4yrs than your calculation.


Regarding zillow:
I did take a look at it. But the companies which offer those low APRs seem to be companies I have not heard of. Hence the hesitation to call in.
 

rated:
javaman2003 said:   Regarding zillow:
I did take a look at it. But the companies which offer those low APRs seem to be companies I have not heard of. Hence the hesitation to call in.

As long as the reviews are not dismal, go for it. I'm familiar with the usual lenders that are brought up here (Quicken, BoxHome, AimLoans, Penfed, Amerisave, etc.) and when I searched in Zillow, none of them could beat the top 3 lenders per Zillow. I inquired with all 3 and chose the one with the best offer. Everything is done online anyway, I don't care much who the guy on the other side is. 

rated:
anthonyu said:   
javaman2003 said:   Regarding zillow:
I did take a look at it. But the companies which offer those low APRs seem to be companies I have not heard of. Hence the hesitation to call in.

As long as the reviews are not dismal, go for it. I'm familiar with the usual lenders that are brought up here (Quicken, BoxHome, AimLoans, Penfed, Amerisave, etc.) and when I searched in Zillow, none of them could beat the top 3 lenders per Zillow. I inquired with all 3 and chose the one with the best offer. Everything is done online anyway, I don't care much who the guy on the other side is. 

No last minute surprises before closing?  

rated:
javaman2003 said:   I thought the monthly payment involved both principal and interest. I am basing my calculation by doing the full amortization.I didn't even think of this, because most of the payment at the beginning is interest, so most of the difference is interest. I didn't check your math, but 4 years doesn't sound right -- I'd expect break-even to be closer to 6 years than to 4. Also you most likely won't be able to tap the principal you've paid off during that time anyway, because it may not be enough LTV-wise to take out that amount in a LOC or HELOC. And if you want to adjust for inflation and opportunity cost, you'll need to use that principal payment.


javaman2003 said:   Regarding zillow:
I did take a look at it. But the companies which offer those low APRs seem to be companies I have not heard of. Hence the hesitation to call in.
It doesn't matter that you haven't heard of them, you can read reviews or search for them right here on FWF. I suspect that most, if not all lenders on zillow are direct lenders. They are not brokers and they actively compete against each other on that marketplace more than any other I know. I believe Bankrate was the first to have something like this, but the rates/fees on bankrate were always higher, quotes had fewer details, the interface is not as good, and there were fewer lenders, so I stopped checking. They make much less on each transaction and make up for it in volume.

The lender must be licensed in your state and they all they all follow the same federal and state laws. They are all there to make money and they value their reviews, so there should be no surprises, or at least no more than with any other lender or broker. The question should be whether taking a chance is worth the savings, which is likely in thousands (immediately at closing due to lower lender fees or better rebates, and over time due to lower interest rates).

rated:
anthonyu said:   As long as the reviews are not dismal, go for it. I'm familiar with the usual lenders that are brought up here (Quicken, BoxHome, AimLoans, Penfed, Amerisave, etc.) and when I searched in Zillow, none of them could beat the top 3 lenders per Zillow. I inquired with all 3 and chose the one with the best offer. Everything is done online anyway, I don't care much who the guy on the other side is. Exactly. In the time before zillow I too looked at box, aimloans, and amerisave, as they were frequently mentioned and had better terms than the big well-advertised banks. I don't know when ZIllow started the mortgage marketplace, but the top lenders there are always better than everyone else.

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