You don’t have to pay closing costs with your upcoming mortgage. It’s not a trick and it’s not a scam – it’s smart financial planning.
First, some background.
Mortgage closing costs are the fees that come with getting a loan. They cover the cost for the people and technology that make your home loan possible.
Mortgage closing costs can be paid in three ways. The first two are basic strategies:
- You bring extra money to your home closing, and pay the costs in cash
- You get the home seller to pay your costs through seller concessions
The third strategy is more advanced. It’s also the best possible option for a lot of home buyers who don’t plan to stay in their new home for the next 30 years.
Option 3 goes like this:
- Accept a higher mortgage rate from your lender
- Have your lender pay your costs on your behalf
- Make a larger monthly payment on your loan
In general, every 0.25 percentage point increase to your interest rate yields a credit equal to one percent of your loan size that you can use toward closing costs.
In a real-world example: When your loan size is $300,000, an interest rate increase of 0.25 percentage points raise your mortgage payment $44 per month, and gives $3,000 to apply towards your closing costs.
If you’re going to move in the next few years, it often smarter to pay the extra $44 per month as compared to bringing a $3,000 more to your closing.
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