Sun Classified

Dear Mr. Gisriel: I am currently negotiating to buy a house. I’ve noticed that some mortgage lenders are advertising mortgages with "no points, no closing costs." How is this possible?

Is there something that needs to be put in my purchase contract that would qualify me for these mortgages?

Robert Price

Severna Park

Dear Mr. Price: Any mortgage lender can, and many do, offer a variation of the "no points, no closing costs" mortgage. Here’s how it usually works:

The purchase contract with the seller of the house must first be negotiated so the seller will be paying all the transfer taxes, documentary stamps, and loan points, if any.

The other normal closing costs and fees are paid for by the lender – which charges a slightly higher interest rate to make up for the closing costs.

This arrangement is used every day by many lenders to help meet the needs of both buyers and sellers.

Is the borrower getting something for nothing? No. In some cases, the borrower might even be paying more. These no-cost mortgages may not work for everyone, but they are available.

Interest Only payments vs. full P.I. payments:

Increasing cash flow is a critical element of building net worth.  A mortgage with interest only payments may help increase your cash flow by lowering your monthly payment.   Funds that would have originally been used to pay down mortgage principal can be directed to meet other financial objectives.

1. Compare Payment Differences

Compare the difference between an amortization of a monthly principal and interest payment and an interest only payment for a $300,000 mortgage at 8.125%.*

Amortization Payment                                                               Interest-Only

$2,227 payment                                                                           $2,031 payment

                                         Difference: $196 a month

* Amortization payment is based on a 30 year amortization and assumes the Rate remains constant.  Interest-only payment would only be in effect for a period of up to 10 years; monthly payments after that period would reflect both principal and interest.

2. Options for redirecting funds

• Pay off higher-cost, nondeductible consumer credit.
• Maximize contributions to 401(k) or other tax-deferred retirement accounts.
• Increase contributions to an investment portfolio.
• Meet day-to-day expenses (not often recommended unless you are at the beginning of your earnings potential).

How Should I Redirect Payment Savings?

Investing "redirected" funds may help you build your net worth.  Compare the total amount of principal you would have paid on the amortization of your mortgage with the potential investment earnings from your redirected funds - the difference is the potential increase in your net worth:

$196 Invested Monthly During the Past 10 Years.

$300,000 example- If you had paid your P.I. payment for ten years (12/87 to 12/96), your Mortgage Principal Pay down would have been $36,153.

If you had invested the $196 difference from our previous example into the Standard & Poor's 500 during the same past 10 years (12/87 to 12/96), your net worth would have increased by $25,618, i.e. that $196 would have grown to $61,771.