New Purchase/Refinance Mortgage…. Pay Points & Fees or Take the No Cost Option?

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By Steve Cline, Preferred Financial

Mortgage loans for purchases and refinances will always carry thousands of dollars in points and fees. Options for paying the fees include paying them upfront, adding them to the principal (in effect, financing them) or my preference: opting for a slightly higher interest rate and doing a zero-cost loan.

Below is an actual loan that closed at the end of April 2019, with the differences noted between paying fees up front and the zero-cost mortgage. I never recommend financing fees so that option is left out of the analysis.

The loan in this example had an under-75% loan to value, a 720 credit score, a loan amount of $585,000 and 1.3% points charged. Using those parameters, the points and fees (including all nonrecurring closing costs such as the appraisal, title, escrow, etc) total $10,378.

If paying the fees upfront, the 30-year fixed rate would be 3.71% with a monthly payment of $2696. If choosing the zero-cost loan option, the rate would be 4.18% with a payment of $2854, a difference of $158 monthly. Dividing the cost for the same loan amount by the difference in the monthly payments ($10,378 divided by $158), it would take 65.7 months to recapture the fees paid upfront.

I almost always recommend the zero-cost option. It not only frees up cash but also allows you to refinance if the rates go down within those 65.7 months with no penalty.

As always, I will be happy to give you all options available for any given purchase or refinance.

Steve Cline Mortgage Broker and Insurance Broker

Office phone - (925) 820 - 5557

Email - SCline@PreferredFinancial.com Website - www.PreferredFinancial.com