Bob Brackney

Dear Susan,

There are so many different factors at play. Let’s assume a few things; you have good credit, job stability, etc. etc. in essence a ‘good borrower” and the collateral (the Home) is not an issue for lending purposes.

First, the easy part; what will the rates do? I've been a REALTOR & Mortgage Broker in Kansas for close to 14 years now and the one absolute I know of is that you can't predict what the rates are going to do on the long run (If this was possible I would be living in the Caribbean somewhere.) I have seen many clients "floating" their rates waiting for the bottom (contrary to my advice) only to get burnt with increasing rates, the daily rates will always go up faster than they go down.

Second, when comparing the “no cost” loan with a loan with closing cost it is important to realize that closing costs are a fact. Someone has to pay them even in a “no cost” loan. With such loans the lender is simply paying the closing cost out of the profits of the loan (Interest rate). As Julie mentioned, It would be interesting to know the rate for a loan with closing costs from B of A and indeed you will need to get that information for the following process. With that info. in hand, comparing the two loans is actually easy. Take the payment savings from the two loans (the closing cost loan will have a lower payment) and divide this into the total closing cost paid. This number gives you the closing cost payoff threshold, i.e. the number of months until the monthly payment savings in the closing cost loan offsets the closing cost saving in the no cost loan. Then you have to ask yourself the likelihood of you being in the home that long. Generally, if this number is more than 36 months, I recommend paying the closing costs yourself, because you would be saving on the payment from then on. Keep in mind the tax ramification of paying more interest or writing off closing costs and talk with you tax professional.

EXAMPLE:

$200,000 loan for 30 years

No closing costs, rate of 6%, PI payment is $1199.10/mth (saving $1700.00 in closing costs)

Closing costs = $1700.00, rate of 5.625%, PI payment is $1151.31/mth (saving $47.79/mth in payments)

Divide $1700.00 by $47.79 you get a 35.57 mths payoff threshold



Sorry for rambling on, but I hope it helps! - Wed Apr 23 2008, 09:31