Can A Lender Pay Your Closing Costs?

[veracious]

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.

[p-]

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@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.

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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!

[veracious]

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

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 eta: proper term for FHA loans vs conventional

[p-]

anytime

[GregB]

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.

[veracious]

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