Have you heard about lenders offering no closing cost promotions? It’s very common these days. Just type “no closing costs” into Google, listen to the advertisements on your radio, or check your junk mail. You’re being offered these extremely attractive deals from every angle. Seeing the opportunity to take advantage of a reduced rate without having to empty the savings account has lead many people to act fast. You just don’t want to miss out.
Unfortunately, what is happening is too many people are making some tradeoff without even knowing it. Whether you know it or not, many lenders are taking the liberty to choose what is best for you (based on what they think, and what they want out of the transaction), rather than giving you the choice to decide. As a result, you might end up paying much more and not even realize it. Most often, you’re paying a higher interest rate to offset the fees you didn’t pay upfront.
Sometimes, it works in your favor, especially if you’re going to be paying off the loan relatively soon. You pay the higher interest rate for a shorter period of time, resulting in less interest paid than the total closing costs had you paid those instead. In other instances, especially those times when you finance your loan over a long period of time or you have the cash to pay the costs, you end up paying hundreds if not thousands more.
You want the better deal, right? So get it. If your lender doesn’t help you understand which options you have, make sure you find out. Here’s how:
- Ask your lender. Know what alternatives are available. How much are the closing costs if you did choose to pay them? Are you affected by a rate increase for taking advantage of the no closing costs option?
- Crunch the numbers. Use a loan calculator to figure out what’s best for you. Compute the total amount of finance charges paid over the life of the loan when you don’t pay closing costs. How much do you pay? Now do the same thing for the loan when you do pay the closing costs, but get a reduced rate. Add the total finance charges together with the total closing costs paid. The loan that results in you paying less is the better deal for you.
Answering this question will help get you started, but there is more to the topic of protecting yourself and one of your most valued assets—your home. The US Department of Housing and Urban Development has some great tips to protect against loan fraud. We know you have other questions though. What are they? What other topics could help you make more educated, informed decisions?
As a homeowner and credit union employee, Stacy is an advocate for a straightforward, real approach to banking. She seeks to remove the presence of fine print and asterisks.