“Discounted Present . . . . What??”

I’m hearing from numerous lenders — and observing with my own Buyers — that more people are opting for loans with higher interest rates, in exchange for paying no closing costs.

So, instead of, say, getting a 30-year mortgage at 5% for $200,000, and paying $6,000 in closing costs (that’s the typical 3%), Buyers are opting to borrow at 5.25% and “save” the $6,000.

Is such a tactic smart?

It depends on how much extra you have to pay for the mortgage.

If you wanted to be rigorous about it, you’d have to calculate the discounted, present value of all those incrementally higher monthly payments, then compare that to what you saved on closing costs.

In turn, that requires choosing the appropriate discount, or interest rate.

FYI, for the no-closing cost choice to be a good deal, the discounted present value number should be less than the avoided closing costs.

Just a hunch, but somehow I doubt that every Buyer heeding the siren call of “no closing costs” is doing that calculation . . . .

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.
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