[quote=HLS]You NEVER get the best rate when you get a no cost loan.
It is a very misleading concept.
There are no fee loans, there are no cost loans.
They are not the same thing. With either of these you are getting a higher rate, which equates to a higher rate and a higher payment for 30 years.
With rates now just above historical lows, I think it is extremely foolish to want a no cost or no fee loan, gambling that rates will go lower.
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Your comment about *never* getting the best rate needs to be qualified. The *best* loan will be the one that costs the least over the time held. Thus, a no cost loan will be better for those with a shorter time horizon, even if the rate is higher. The key variable is how long one expects to be hold the loan.
For example, here are two hypothetical 30 year loans:
Loan A (points & fees): 5% rate, with 6k in pts/fees/closing. APR = ~5.2%
Loan B (true no cost): 5.5% rate, $0 pts/fees/closing. APR = 5.5%
Scenarios:
> Owner holds for one year, then sells or refis at a lower rate. Loan A’s true APR jumps to 8.8% (due to amortizing fees over 1 year vs. 30). Loan B’s APR remains unchanged at 5.5%.
> 3 year holding period, Loan A = 6.4%, B = 5.5%
> 5 years is ~ breakeven, Loan A = 5.4%, B = 5.5%
> Over the next 25 years the APR on loan A will be reduced slowly to 5.2% resulting in greater & greater savings over loan B.
Generally, the more spread between the rate and APR, the larger the fees and the longer the breakeven point (vs. lower fee, higher rate/APR loans). If you think you’ll be there over a decade, then shop by the lowest APR, if your time frame is < 5 years, shop for the best rate with the lowest fees.
Either time frame carries risk, as planning to stay for the long haul may be interrupted by job loss, relocation, family crisis, etc., while expecting to move/refi within 5 years may not be possible due to credit issues, equity reduction, etc. As a general rule, I tend to want to pay as little upfront as possible.
As for the foolishness of waiting for rates to drop further, if deflation worsens you could see rates substantially lower, thus making a no/low cost, fixed 30 year loan a good hedge, since you have the ability to refi down at anytime w/o losing the chunk of cash used for pts/fees but you're still locked into a good 30 yr. rate in case inflation spikes due to all the gov't intervention.
Also, for refi's, a true no cost loan at a rate less then your current loan is "risk free", with the option to refinance at a lower rates in the future (should that occur) without any break-even analysis.
One should crunch the numbers to verify what is best for their particular situation and determine how much risk (if any) they're willing to take on various scenarios.
