One of our most popular refinance programs utilizes a system whereby the lender pays most, if not all of your closing costs in exchange for a slightly higher interest rate. This makes sound financial sense for those who plan to keep the new loan for a shorter period of time

To determine the best option for your situation, you can compute the actual break-even timeframe for your refinance loan by dividing your monthly savings from the proposed lower rate into the cost of the refinance. For example, let's say that your current interest rate is 7.75% on a $150,000 loan, and that to refinance your loan to an interest rate of 7%, your closing costs would be $3,000. That would mean that by lowering your monthly principal and interest payments from $1,074.62 at the 7.75% rate to $997.95 at the 7% rate, you would save $76.67 per month. If you divide that amount into the $3,000 closing costs, you will find that it would take 40 monthly payments or 3 years and 3 months just to break even from the cost of refinancing. It is only after 40 months that you would begin to save any money in this example. If for some reason, you sold or refinanced the home before the 40th payment, you would actually LOSE MONEY on your refinance.

A better option to consider may be to have the lender pay the closing costs in exchange for a higher rate. As a general rule of thumb, each .25% higher interest rate equates to a 1% rebate. This means that for the same loan of $150,000 with $3,000 in closing costs, you could accept a .5% higher interest rate in exchange for a $3,000 rebate from the lender to cover your closing costs. In this example, your payment would drop from $1,074.62 to $1,048.82 - a savings of $25.80 per month. While your monthly savings are lower using this program, you start saving money the very first month since your closing costs have been paid by the lender.

Keep in mind that the amount of rebate needed to cover closing costs will vary depending on the size of the loan amount. While some closing costs vary depending on the loan size such as discount points, title insurance premiums, and escrow fees, most closing costs are fixed such as appraisal, credit reports, processing fees, lenders fees, and recording costs. Therefore. the lower the loan amount, the more rebate it takes to cover the closing costs. Conversely, the higher your loan amount, the rebate needed to cover the closing costs is lower which results in a lower interest rate.

It is also important to realize that you can choose the interest rate and the corresponding rebate you desire. This gives you the flexibility to structure your refinance with the residual closing costs that you are comfortable with. While some borrowers may choose an interest rate with a 2.5% rebate, others may choose a lower rate and only receive a 1% rebate.

In order to accurately determine the closing costs for your proposed refinance loan, click here to submit a request for a refinance analysis.