Is there any logic behind paying closing costs or paying no closing costs?

aaronpaul

New member
Is there a magic formula to this?  The option is to have 0 closing costs with a higher rate or pay closing costs with a lower rate.  My math tells me to take the monthly difference in payment's, and then see how long it would take to pay that off to equal the amount of the closing costs I'm paying.

If I'm going to live in the house longer than that time, than it would be worthwhile to pay closing costs now?

Or is there a magical spread % that I should be looking at?
 
In general you are better off paying zero closing costs because you can always refinance which would negate any monthly savings you have even if you are still in the home.

But yes - calculate the break-even point. I think Americans stay in purchased homes for an average of 7yrs so I'd guess they stay in mortgages for around 3yrs on average. If the break-even point is less than 3yrs, go ahead and pay the closing costs.
 
You are absoulate correct by calculating how many extra monthly payment will equal to the break even point for the closing cost.

Typically it will take around 7 years to break even but most of the time and there will be a good chance that owner will sell the home or do another refi long before the break even point. 

So pay a little higher rate with some credit to covering closing cost seems like a better bet.
 
Couple of thoughts as there isn't a "right" or "wrong" way to this question. It's all based on personal circumstances and can't be diagnosed with a one size fits all answer.

1) If you are advised to do so by your tax professional, pay points to buy the rate down. Everyone has a unique tax profile and in some cases it isn't a bad idea to do so.

2) If you can capture an "unrefinanceable rate" (3.25% 30 fixed for example) pay the closing fees. At 3.25% 30 fixed, it would be tough throwing that away for a 2.xx ARM loan that will change in 3-5 years, best case.

3) Any "break even point" under 2.5 years is a reasonable risk to pay fees. It's possible you could refinance, but that is never a given. At the bottom of the rate cycle a couple of years ago, a zero fee 30 fixed might have been 3.5%, but 3.25 would have cost X. Paying X at that time would have been prudent, given the chance that 30 fixed would ever get priced below that is a slim and none proposition.

4) If you believe (as I do) that mortgage rates will stay at or near 4.0% for some time, I'd avoid paying fees. If you can get 4.0% for no cost,  the opportunity to refinance might come up at 3.75%-3.50% without fees, but hopefully lower with fees. If you believe that rates might rise and remain above 4.0%, then capturing the lowest 30 fixed rate you can now, even with costs, might be the right thing to do. It's more of a piece of mind question than anything else. So if you are wrong and rates plummet, you can refinance, chalk up that relatively small loss to experience. If you're right, you'll sleep peacefully. That's the point of this debate in the greater sense of things, no?

5) Rate buy downs for ARM loans almost never break even - Know however this remains a rule of thumb, not one of the 10 Commandments.

6) It's possible to lower your rate by moving funds to the bank funding your loan. Ask about that option. A combination of $$$ moved, plus some fees being paid can hit that "unrefinanceable rate". Most thresholds for "new money/lower rate" begin when more than $200k is moved, but if you've got IRA's/401k's etc that could be consolidated, why not move them? A combination of $$$ moved at closing could nab an extraordinary rate today.

Imagine the BBQ conversations with your new neighbors: "So, Rick, I closed at 3.625% on my 30 fixed. How did you do?" "Well, Morty, I got something closer to 3.0% on my 30 fixed. Yeah,  Just happened to catch a break..." Rick: "what the what what?!?!"

My .02c

Soylent Green Is People.
Remember...Tuesday is Soylent Green Day.
 
I am not a tax professional, but deducting points may not be worth it unless you can deduct the full amount in the tax year. According to my research, you can deduct the full amount for purchase or cash out loan such that the cash is used for home improvement, plus other criteria. Other wise the deduction will have to be spread out over the life of the loan.

On the other hand, you can deduct the remaining amount of points of the old mortgage in the year of refinance, because the old mortgage's life comes to an end.
 
The California Court Company said:
I am not a tax professional, but deducting points may not be worth it unless you can deduct the full amount in the tax year. According to my research, you can deduct the full amount for purchase or cash out loan such that the cash is used for home improvement, plus other criteria. Other wise the deduction will have to be spread out over the life of the loan.

On the other hand, you can deduct the remaining amount of points of the old mortgage in the year of refinance, because the old mortgage's life comes to an end.
here are the requirements to deduct points in full in the year of the loan

You can deduct the points in full in the year you pay them, if you meet all the following requirements:

    1 - Your main home secures your loan (your main home is the one you live in most of the time).
    2 - Paying points is an established business practice in your area.
    3 - The points paid were not more than the amount generally charged in that area.
    4 - You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
    5 - The points paid were not for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
    6 - The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.
    7 - You use your loan to buy or build your main home.
    8 - The points were computed as a percentage of the principal amount of the mortgage, and
    9 - The amount shows clearly as points on your settlement statement.
http://www.irs.gov/taxtopics/tc504.html
 
On cash out refi for home improvement:
"You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above"

More from publication 936.
Refi with different lender:
"Mortgage ending early.  If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.

  A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. "

Points can be called many things:
"The term ?points? is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points."

So if 1098 box 2 does not show points , you can instead use line 803 of HUD-1 (adjusted loan origination fees) I believe.


 
Back
Top