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Is a NO Cost loan right for you?

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Is a NO Cost loan right for you (ie….the Math behind NO Cost Loans?) 

It may sound strange but Math is your best friend when it comes to shopping for a mortgage.  Your calculator probably knows very little about mortgages but it is an expert on Break-Even Point Analysis. 

So, what is Break-Even Point Analysis?  It is a fancy term for a very simply and common sense approach to evaluating loan options.  We already know rate is a function of cost (remember our see-saw example.) 

Here at Brightpath, we like to give you options since not everyone's situation is the same.  One potential option is a NO Cost loan where WE pay the cost, the second is a 'Par rate' (ie...a point at which we do not generate a credit OR cost associated with the rate leaving YOU to pay the basic closing costs, and a third option providing the prettiest rate but ugliest closing costs (remember, as rate goes down costs go up due to something called Discount Points.)  So, now we have a few options to choose from, how do we pick the right one? 

  • The first step in comparing options is to identify the difference in closing costs.  We then determine the difference in monthly payment (ie...savings derived from the lower rate.)  Divide our savings into what we paid to get it (ie....closing costs) and that's your Break Even Point!  It is the number of months or years needed to recoup your upfront investment in the form of closing costs via the monthly savings.  The shorter the term, the better a deal. 
  • Additionally, you need to be sure you'll have the home long enough to not only meet but beat that break-even point.  It's kind of like ordering the All You Can Eat buffet and then getting filled up on salad and breadsticks.  You spent $29.99 to eat $4 worth of lettuce.  Not a good deal!  If you pay the additional cost, be sure you'll be around long enough to take full advantage of it. 

Here is a quick table to illustrate the Break-Even Point analysis process:

 

Based on the figures provided, it would take 8.3 or 8.7yrs for the lower rates to, in fact, become the 'better' rates.  If you plan to live in the home for 20yrs, Options II and III could be great choices.  However, if you plan to downside or relocate at any time prior to 8.3 years, you are better off with Option I.

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