Ever wonder how they do those Zero Cost Loans? Whats the angle? This article will help clear it up a little.
There are many benefits to doing a Zero Cost Loan. The most obvious one is that it cost you nothing. The APR is exactly the same as the note rate. How is this done you ask? Through a little higher interest rate, a company will receive extra compensation from the lender directly. With this extra compensation they pay for your closing costs. It's as simple as that!
Your payment, most often will be a little higher then if you were to pay closing costs and roll them into the loan. But the amount of time it would take to make the money back through monthly payments would usually be out past around 5 years. To get your accurate break even point a good broker will give you a free evaluation.
Most people will refinance or sell before the first 5 years is up on the loan. Not to mention if it is a band-aid loan which is intended to boost your credit and then refinance. With this scenario it is definitely the wisest choice to make because you know you are going to refinance again within the next few years… maybe as soon as a few months.
Another reason for doing a zero cost loan would be; that if rates happen to go down in the future, you can refinance again to the initial rate in which you were going to pay for. And it now has cost you nothing. If you recall back in the late 90’s when rates were much higher and there was a steady downtrend, some of you may have refinanced over four times and each time paying upwards of $5,000 in closing costs. That’s $20,000 total back into your loan. With a Zero Cost Loan your balance would have remained the same. You can always refinance to a lower rate, but its much harder to refinance to a lower balance.
About the only time you would not want to do a zero cost loan would be on some of the larger loan amounts of $600,000 and up. The reason for this is that the interest rate is being applied to a larger sum of money and the break even point becomes only a few years out… it simply savings after that point. A good broker will always give you the option of paying closing costs if you prefer, in fact some scenarios may warrant it. Yet, I’m sure you will see that a Zero Cost Loan is preferred.
