No Points/No Closing Cost Loan vs. Lower Rate Loan

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A No Points/No Closing Cost Loan or a Lower Rate Loan. Which Is Better?

No Points/No Closing Cost Loan vs. Lower Rate Loan

The best choice for you depends on your circumstances and future plans. It also depends on whether you are purchasing or refinancing your home. What factors are important to consider?

  • How long do you plan to keep this mortgage loan?
  • If you are purchasing, how much money do you have for the down payment and closing costs?
  • How strong or weak is your credit?
  • If you are refinancing, how much equity do you have in the home, which determines how much cash you can receive at the closing?
Your comparison of the terms that are available to you should include

  • How much higher is the fixed rate or the start rate, index and margin if you choose a no points/no closing cost (NP/NCC) loan versus a lower interest rate loan? If you are going to keep the home and mortgage for a long period, you are almost always better off if you take the lowest interest rate available.
  • How much actual cash will you save by choosing an NP/NCC loan versus a lower rate loan? If you are lacking sufficient down payment and closing cost funds or sufficient equity to generate these funds in a refinance, the comparison may be easy. But if you have these funds and/or equity but are considering the cash savings you might enjoy, the question becomes “What are you going to do with the cash saved?” Are you going to save it for a “rainy day” or invest it somewhere? How much can you earn if you invest this money? Or how much is it worth to have the “security” of having more liquid cash than you would if you chose a lower rate loan? Excess cash that is just “sitting around” can be a very expensive asset but if it makes you more comfortable to have it, then choose the lowest closing cost option.
Should you be comparing these options for an investment property, the questions remain basically the same. The added comparison factors are the income you will make from the property and your primary investment goal, to generate cash flow and positive net income or build equity for the long term. Always keep your goals in objectives at the top of your list and compare, then select the option that provides the best way to achieve your plans.

The bottom line, as always, remains: The longer you plan to own the property or at least keep this mortgage loan, the more sense it makes to take the lowest interest rate you can get. Period.



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