Reply
Established Contributor
Posts: 680
Registered: ‎04-21-2010
0

Can A Lender Pay Your Closing Costs?

I read that a lender can help pay your closing costs by using negative points.

With today's interest rates at or near record lows, would this be a good strategy in order to apply all of your available

cash toward the down payment,thus avoiding PMI ?

 

If this is not a good strategy please explain why.

 

 

Thank for any replies.

_________________________________________________
"You may never know what results come of your actions,
but if you do nothing, there will be no result" ~ Mahatma Gandhi
Valued Contributor
Posts: 2,658
Registered: ‎06-05-2008
0

Re: Can A Lender Pay Your Closing Costs?


veracious wrote:

I read that a lender can help pay your closing costs by using negative points.

With today's interest rates at or near record lows, would this be a good strategy in order to apply all of your available

cash toward the down payment,thus avoiding PMI ?

 If this is not a good strategy please explain why.

 Thank for any replies.


Quick answer - It Depends.

 

If you're looking at an FHA loan, the cost of PMI is very high, but the long term cost of a higher interest rate could be even higher.  The way I would look at it is in an overall amortization.  Find out the cash value of negative points.  Then, visit this site and plug in your loan amount, interest rate, and term for the two loan options.  The standard, and the one with the higher rate from neg points.

 

Compare the following on a spreadsheet:  

 

1. Monthly payment of option 1 with PMI added, Monthly payment of Option 2 with no PMI.  

 

2. Total interest paid over the loan life for each option.

 

3. Use the full amortization schedule to figure out how long you'll pay PMI; you must pay a minimum of 5 years, plus to end it you must have your loan down to 90% of the appraised value at the time of origination (I think that's rght, check HUD).

 

4. Compare the total interest plus PMI of option 1 to the total interest of option 2.  Which one costs you less money in the end?

 

5.  Compare the monthly payment of option 1 without pmi to option 2.  This is what you'll pay after 5 years.

 

Basically, if your total out of pocket is less over the long term with the PMI, you should go that route.  I'm guessing that's how it will calc out, but it's hard to say without seeing your loan's particulars.  Even if your monthly payment is a little higher, if your total out of pocket is less go with that.  I doubt interest rates will be this low again for a long time, so you likely won't get a chance to refi to a better rate.

 

If you have almost enough for a down payment to avoid PMI, you might consider running the numbers and see how it plays out if you use that money to buy down points instead.  I'm not saying that's the right move, but it could be.  Calc it and find out.

 

Good luck!

3-26-15: FICO EXP: 814 - EQU:813 - TRAN: 809 - AVG: 812 +262 points from JUN 2008 - MY CREDIT JOURNAL

Established Contributor
Posts: 680
Registered: ‎04-21-2010
0

Re: Can A Lender Pay Your Closing Costs?

[ Edited ]

Thanks,  p-

 

 I suppose in my situation, most people would buy down the rate.

 

I think that would work best for me because I plan on being in the home for longer than 7yrs.

I read about the negative points and thought it would be worthwhile, but the  numbers don't look good.

If I had less of a down pymt. I might have considered the strategy.

 

The FHA loans are attractive because of the minimal down pymt. but as you said, the PMI /  MIP   is bad right now.

 

I'll keep saving for the down pymt. and hopefully  the right deal will surface, I'm in no hurry since we're empty nesters.

 

Thanks again for the link to the calculator.

 

     veracious

 


 eta: proper term for FHA loans vs conventional

 

_________________________________________________
"You may never know what results come of your actions,
but if you do nothing, there will be no result" ~ Mahatma Gandhi
Valued Contributor
Posts: 2,658
Registered: ‎06-05-2008
0

Re: Can A Lender Pay Your Closing Costs?

anytime

3-26-15: FICO EXP: 814 - EQU:813 - TRAN: 809 - AVG: 812 +262 points from JUN 2008 - MY CREDIT JOURNAL

Valued Contributor
Posts: 1,671
Registered: ‎05-24-2007
0

Re: Can A Lender Pay Your Closing Costs?

Don't forget to figure out how much you would save if you put the money wasted on PMI into additional principal. You will be far ahead if you put enough down to avoid PMI even if you don't pay additional money against the principal.

 

It is usually safe to say that any loan with PMI is a bad loan.

Established Contributor
Posts: 680
Registered: ‎04-21-2010
0

Re: Can A Lender Pay Your Closing Costs?

Thanks, GregB. for replying.

 

I agree that any loan with PMI is a bad loan.In today's market  it is especially troubling due to the soon-to-be

legislation called   Qualified Residential Mortgage.

 

I'm sure this new rule will raise rates significantly on all home loans with less than 20% down.

Another impact is that it may drive many of the smaller lenders out of businesss or seriously impact the number of loans

that they can facilitate.            At least those who can't afford the 5% risk retention

_________________________________________________
"You may never know what results come of your actions,
but if you do nothing, there will be no result" ~ Mahatma Gandhi
Advertiser Disclosure: The listings that appear on myFICO are from companies from which myFICO receives compensation, which may impact how and where products appear on myFICO (including, for example, the order in which they appear). myFICO does not review or include all companies or all available products.
† Credit cards for FICO Score ranges: The score ranges are guidelines based on actual applicant approvals and having a FICO Score in a particular range does not guarantee you will be approved for credit cards recommended in that range.

Copyright ©2001-2015 Fair Isaac Corporation. All rights reserved.   | Terms of Use | Privacy Policy | Sitemap

IMPORTANT INFORMATION: All FICO® Score products made available on myFICO.com include a FICO® Score 8, along with additional FICO® Score versions. Your lender or insurer may use a different FICO® Score than the versions you receive from myFICO, or another type of credit score altogether. Learn more

FICO, myFICO, Score Watch, The score lenders use, and The Score That Matters are trademarks or registered trademarks of Fair Isaac Corporation. Equifax Credit Report is a trademark of Equifax, Inc. and its affiliated companies. Many factors affect your FICO Score and the interest rates you may receive. Fair Isaac is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. Fair Isaac does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating. FTC's website on credit.