How does the No Cost work?
Normally, a mortgage loan will have closing costs associated with the transaction in the neighborhood of $3,000 to $4,000 or even more, depending on whether you decide to pay points upfront. The way the no closing cost mortgage works is the lender gives Starwest Mortgage a broker rebate at closing, which Starwest then uses a portion to pay for all the closing costs associated with the transaction, including underwriting fees, processing fees, appraisal fees, title fees, and origination fees. None of these fees are rolled into the loan balance.
Generally, most banks’ no closing cost loan structure corresponds with a slightly higher interest rate versus a standard closing cost loan. However, Starwest’s lender relationships and company volume allow the brokerage, in most cases, to offer no-cost interest rates at the same or even lower rates than their competitors’ standard fee loans.
Because Starwest does not include prepayment penalties on any of their mortgages, the no closing cost loan allows you to take advantage of lower interest rates in the future without paying new costs or foregoing the closing costs and points invested in the previous loan. Even when you have recently purchased or refinanced, you have the flexibility to take advantage of lower interest rates or change loan programs.
How do you decide if the no-cost program is your best option? First, you must determine how long you plan to own the property and whether refinancing is a future possibility. Future financial flexibility is one of the main advantages of the no-cost loan.
Once you reach your theoretical goals for the property, you can easily decide by calculating the break-even point and looking at the difference in payments for the no-cost loan versus other closing cost structures. Then, divide that difference into the total closing costs you will pay at closing. The solution to this calculation will tell you how many months it will take to recoup the closing costs paid and realize the projected monthly savings. A yearly break-even point is calculated by dividing the months to break even by 12. If your no-cost loan includes an extra credit towards the first month’s payment interest (prepaid interest) or escrows (property taxes and insurance), combine the extra payment figure with the total closing cost amount before dividing it by the payment difference.
Below is an example table of no-cost and cost loan comparisons using break-even analysis. As this example illustrates, the no closing cost (No Points, No Fees) option provides immediate savings and the flexibility to benefit from future interest rate drops. Additionally, if later on you decide to reduce your loan term, change programs, or take cash-out, the no-cost loan allows you to do this without losing money invested in closing costs.
Option 2 reflects Total Closing Costs of $2,800; therefore, you will not realize any savings by paying closing costs for a slightly lower interest rate for 12.29 years. In Option 3, the sum of the Total Closing Costs equals $5,800 and corresponds with a break-even time of 7.94 years. Both closing cost option scenarios only make financial sense if you know you will occupy the property for longer than these yearly break-even times. Only then will you realize a return on your closing cost investment. Additionally, you will want to consider the possibility of future refinancing or loan program restructuring flexibility for 12.29 or 7.94 years without losing money invested in closing costs. Please click here to calculate your customized break-even analysis and select the proper closing cost program.
All 30-Year Figures Are Examples (Not Current Rates). Rates & Credits Are Subject To Change.
Closing Cost Alternatives
Starwest Mortgage does offer all types of closing cost programs. This example aims to illustrate the differences between the available closing cost options, so you can determine the situation that suits your financial goals. Most lenders do not provide the luxury of selecting closing-cost alternatives.
Frequently, Starwest will have additional rebates left over after all closing costs are paid. In this scenario, Starwest passes the leftover rebate to the borrower as an extra credit towards the first month’s payment interest (prepaid interest) and escrows (property taxes and homeowners insurance) at closing. These additional credits vary per consumer, based on the loan size and the interest rate market conditions the day the interest rate is locked.
Credit is NOT cashback from your loan balance, this is an extra credit from the lender. The credit CANNOT be given as cash at closing; credit may only be applied to prepaid interest or escrows. Credit amount varies depending on the rate, our costs, program, and day you lock.