No-Cost Mortgages Still Cost

By Scott Sheldon

“There’s no such thing as a free lunch.”

Such words have never been more relevant to consumers being pitched no-cost mortgages, which offer borrowers the ability to pay no closing fees.

No-cost loans do provide the consumer another choice in world of mortgage financing. On the other hand, the fees associated with procuring these loans still need to be paid, and the cost comes in the form of a higher interest rate, costing the borrower more over the life of the loan.

Crunching the numbers

Here’s how a no-cost loan works: The mortgage lender offers you a higher interest rate in exchange for providing you a credit to cover your closing costs.

For example, assuming a loan amount of $300,000 and closing costs of $2,600, the lender might offer you three distinct choices:

1. 30-year fixed rate mortgage at 3.26 percent with 1 discount point (based on 1 percent of the loan amount) and you paying $2,600 in closing costs.
2. 30-year fixed mortgage at 3.5 percent with no points and you paying the $2,600 in closing costs.
3. 30-year fixed mortgage at 4 percent, no closing costs.

Comparing options 2 and 3, here’s how the math breaks down:

The 30-year fixed mortgage at 3.5 percent 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 percent, 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.

So if the closing costs are $2,600, you would actually break even in about 30 months by paying the closing costs yourself and forgoing the no-cost option.

Length of loan

Ultimately it boils down to how long you plan to keep the loan. (Notice that’s how long you keep theloan, not how long you keep the house.)

If you plan on keeping the loan for:

• 3 years or less: A no-cost loan makes sense considering that you’re going to be paying off the loan anyway.
• 5 to 7 years: A no-cost loan begins to look less attractive than its fee mortgage counterparts.
• 10 years or longer: No-cost loans take a backseat to fee mortgages.

If you’re in the process of refinancing and qualifying for a mortgage is tight, then it might be beneficial to use a no-cost loan option. For example, if you have to pay down your principal balance to refinance your mortgage loan, a no-cost loan might make sense considering your cash assets would be going to the principal balance to reduce the amount financed.

Securing the lowest possible mortgage rate is on every consumer’s mind these days, but in order to achieve that, a no-cost option wouldn’t be suitable. To get the best possible interest rate and subsequently the lowest monthly mortgage payment, consider taking out a no-points mortgage loan or a loan containing discount points, so long as the interest rate is favorable.

Related:

• Which Mortgage Company Should Handle Your Loan?
• How the Election Could Influence Mortgage Rates
• How Much Income Do You Need to Buy a House?

Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. Scott has been seen in Yahoo! Homes, CNN Money, Marketwatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

Date Issued: November 2012 Taken from: http://www.zillow.com/blog/2012-11-06/no-cost-mortgages-still-cost/

Real Estate Professionals Optimistic About Home Values

Taken from: realestate.aol.com

With signs that a real estate recovery may be kicking into gear, a new survey shows a sharp increase in optimism among real estate professionals about the direction of home values.

A survey conducted by home valuation website HomeGain found that the number of real estate professionals who expect home values to increase has more than doubled over just one quarter. Thirty-seven percent of respondents surveyed so far in 2012 said they anticipate that home values will rise in the next six months, up from 15 percent in the fourth quarter of 2011.

"The trend has been stay the same or decrease. And here it flipped for the first time," HomeGain General Manager Louis Cammarosano told AOL Real Estate. He added that since HomeGain began administering the survey in the second quarter of 2009, the percentage of respondents who have expressed a bullish outlook on the market has never risen above 25 percent, and for much of the time, has sputtered around 15 percent.

The spike in optimism about home values follows recent reports that corroborate the view that the housing market is stabilizing. Home sales are trending upward and homebuilders are reportedly more optimistic than they've been in many years. Home prices continue to fall, but a number of industry observers say that price direction isn't necessarily the most important bellwether of a recovery.

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Budge Huskey, president and chief operating officer of Coldwell Banker Real Estate, says he sees confidence among real estate agents that he hasn't observed since the housing meltdown. "What is consistently being represented out there today is that there is a sense of optimism in the real estate business that has not been seen in the last five to six years," he told AOL Real Estate.

While cautioning that real estate agents "tend to always be optimists," Huskey stressed that "this time it's based on what we believe to be some clear trends."

Prominent among the hopeful signs, Huskey says, is the state of the housing inventory, which had fallen to 2.3 million homes, or approximately a six-month supply of for-sale homes, as of January. That's the lowest level of inventory since March 2005, according to the National Association of Realtors, which released the statistic.

Meanwhile, total home sales have risen by 13 percent in the last six months, Capital Economics says. And while construction of new homes, dropped marginally in February, they still were at the second-highest level since October 2008, the National Association of Homebuilders says.

A last sign, much ballyhooed by industry optimists, is the state of homebuilders' confidence: The National Association of Home Builders sentiment index reached 28 in February and remained at that level in March. Not since 2007 have homebuilders expressed such confidence in the housing industry.

Despite sprouting green shoots in the market, home prices continue to slide, and even when they do eventually trend upward, many economists say, the increase will be gradual. That fact has led some industry observers to call for a rethinking of what actually constitutes a housing recovery, and to avoid treating price movement as the all-important indicator of a recovery.

Capital Economics, for instance, recently stated that even though prices declined last year (around 4 percent according to various estimates) and mortgage rates are finally ticking up, theeconomic analysis firm still believes that the real estate market is making inroads.

But CoreLogic senior economist Sam Khater advises against buying too much into the hype. "I would be cautious about folks getting too optimistic," he says.

The 1.6 million homes that are in a state of foreclosure are about to hit the market at a faster pace in the wake of an agreement reached between the government and major mortgage servicers over acceptable foreclosure practices, Khater says. That'll drive down prices, he says, as banks begin to push through foreclosures that they previously halted during negotiations of the $25 billion settlement reached last month.

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"There's going to be a really long tail to this," he cautions. Still, Khater says that rising sales and the fact that fewer homes are flowing into the "shadow inventory" -- homes in a state of foreclosure -- are positive signs for the real estate market.

Huskey says the next healthy housing era will be a more "traditional market" that will stand in stark contrast to what he calls the "steroid years," when prices rose at an unsustainable pace.

As CNNMoney recently put it, "If you're waiting for home prices to go up, then you're missing signs the troubled housing market has finally turned around."

Gallery: 10 Places Where Home Prices Are Soaring

Real estate professionals also stress that a housing recovery should not be judged from a birds-eye view, since market conditions vary dramatically from state-to-state and city-to-city. In states walloped by the real estate market collapse, real estate agents are significantly more optimistic that home prices will rise in the next six months.

Eighty percent of Arizona real estate agents and homeowners, 75 percent of Nevada agents and homeowners and 51 percent of Florida agents and homeowners told HomeGain that they believe home values will rise in the next six months. The optimism in Florida dovetails with dramatic price gains recently reported by Realtor.com. The online marketplace reports that out of the 10 metropolitan areas that saw the highest price increases in their database in February of 2011, seven were in Florida. Miami median home prices increased by 26.19 percent, the listing service says.

Meanwhile, in states that weathered the housing crisis relatively well, a much higher percentage of real estate agents and homeowners believe that prices will drop. In Connecticut, 60 percent of agents surveyed said that they thought prices would continue to fall.