CASE STUDY # 1

Scenario:  One of our clients recently came to us with an adjustable rate mortgage and the first change date was quickly approaching. Based on the current interest rates, the loan will adjust at a rate that is about ½% - ¾% above the current market for a 30 year fixed.

Under normal circumstances, it wouldn’t make a lot of sense to pay +/- $3,750 in closing costs to refinance to a rate that is only slightly better. But once the interest rate adjusts, it will adjust every 12 months going forward. My client asked me, but what if rates keep going higher? I suggested that she refinance now on a No Closing Cost loan.

This way she keeps her options open if rates go lower in the future to take advantage of a 2nd No Closing Cost refinance, thereby saving even more money. In her case, her existing loan was set to adjust to a rate of 7.625% and the current market for a 30 year fixed rate was 6.5%. She would have spent $3,750 to lock in that rate. For a slight premium in rate, she was able to lock in at 6.875% and pay No Cost at all! On her $225,000 loan, it would have taken her roughly 5 years to recapture the money spent on closing costs with the $55.00 monthly savings the lower interest rate would have provided.

CASE STUDY # 2

Scenario:   Another client, let’s call him Mr. Smith, originally bought his home in 2005 with 100% financing. The first mortgage was on an adjustable rate and the second loan was a home equity line of credit that had risen dramatically since they purchased the house. He approached me in the summer of 2006 to refinance. He purchased it for $300,000 and the appraiser estimated that it would come in at a value around $315,000 today, a 5% increase. This slight increase in value allowed Mr. Smith to lock in a longer term fixed rate first mortgage at a slightly better rate and to get a fixed rate on the second loan at a much better rate.

The challenge was that because the home had only appreciated 5%, there was not enough equity in the house to roll in the closing costs. (you get a much better rate if you have 5% equity in the home, so we wanted to try to keep the loan balance at this level). This is where the No Closing Cost loan really came in handy….Mr. Smith took a rate that was ¼% higher and the lender paid his  $4,250 in closing costs in exchange. If he had elected to pay the costs to get the lower interest rate, he would have had to write the check for the closing costs out of his own pocket. This way Mr. Smith was able to vastly improve his current situation, while leaving the door open to take advantage of lower rates in the future.