Looking For Loans In All The Wrong Places

By Dan Melson on October 19, 2007 7:00 AM | Permalink | Comments (0)

No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.

As I have said before on many occasions, cheapest rates or lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff.

This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.

No cost loans can be and often are the smart thing to do. Because they are the only loans where there are no costs to recover, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent at $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years, you'll be ahead with the zero cost loan.

If the loan has a fixed period of less than the breakeven time, you also know that the costs are not a good investment. If this loan were only fixed for five or seven years, well even if you decide to hang onto the loan after it adjusts, the rates go to precisely the same rate after adjustment. If you haven't broken even by then, you never will.

So whereas a true zero cost is often the best and smartest way to go, it will never be the lowest rate available.

Caveat Emptor.

Tags

Bookmark this on Delicious StumbleUpon Toolbar

Stumble It!

Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites). All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.