You’ve probably seen the ads for “no-cost mortgages” on TV or heard them on the radio. The pitch often appeals to potential homebuyers who want to avoid closing costs.
Strategy: Crunch all the numbers before you commit. Most important, don’t forget to take taxes into account.
Let’s look at an example recently illustrated in The Wall Street Journal.
Facts: A mortgage lender offers you a higher interest rate in exchange for a credit to cover your closing costs. Assuming a loan amount of $300,000 and closing costs of $2,600, you’re given two choices:
- A 30-year fixed-rate mortgage at 3.5% with no points and $2,600 in closing costs.
- A 30-year fixed-rate mortgage at 4% with no points and no closing costs.
In comparing the two options, here’s how the math breaks down:
The 30-year fixed mortgage at 3.5% contains total interest paid over the life of the loan in the amount of $184,968, so the total cost of the mortgage (computed by adding the closing costs to the interest paid over the full term) is $187,568. With the 30-year fixed rate no-cost option at 4%, the total interest over the full term of the loan comes to $215,609. The total cost difference is $28,041, or about $85 per month.
Therefore, if the closing costs are $2,600, you would actually break even in about 30 months by paying the closing costs and forgoing the no-cost option.
But this computation ignores the tax deduction factor. Assuming the mortgage interest is fully deductible, a taxpayer would recoup the extra interest cost even sooner.
A good rule of thumb is that a no-cost loan makes sense only if you intend to stay in your home for 2½ years or less. It’s a gray area between 2½ and five years. After five years, it rarely makes sense.
Tip: Generally, points paid on a home acquisition mortgage are currently deductible, but points paid to refinance a mortgage generally must be amortized over the life of the loan.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/34109/no-cost-mortgages-factor-taxes-into-the-equation "