On a $500,000 loan, with a yearly interest rate of 6 percent, you will have to pay a normal 1 percent origination fee or $5,000. This origination fee is paid to the bank or lending company where the mortgage loan originated as their fee for processing the closure of your loan.
For purposes of computation, let us assume the total of the other closing cost fees amounts to $3,000. Hence, you will be required to pay out a total of $ 8,000. If you proceed with the no cost refinancing scheme, the interest rate now increases from 6 percent to 6.5 percent, or a .5 percent increase. This is due to the fact that the additional $8,000 added to your refinanced mortgage also earns interest.
Instead of paying only $16,398.58 in interest expenses per year, you pay $17,778.50, or a net increase of $1,379.92, in interest expenses. If the loan is a period of 30 years, the unnecessary increase in interest expenses of $1,379.92 multiplied by 30 years means you pay unnecessary costs of $41,397.60 in interest expenses for the duration of the loan.
Consider the fact that the total amount of $41,397.60 could have been part of your available funds instead. The unnecessary increase of $1,379.92 per year divided by 12 months means you could have set aside $115 per month as your savings instead of incurring it as a needless expense.
If interest computations on loans confuse you, make use of the amortization schedule calculator or the refinance calculator available on the Internet. All you have to do is input the variables like the interest rate, loan term, and start date, and the calculator automatically computes the amounts of monthly principal and interest due, computes total payments or total interests to be paid, and even estimates the pay-off date or due date.
A no cost refinance loan is too good to be true because financing institutions like banks and lending companies also incur expenses to operate their business. In the same way that individuals try to maximize earnings by cutting expenses, banks also try to maximize their earnings through their marketing schemes and strategies.
In fact, if you are aware of the nature of some refinance closing cost fees, you can negotiate a lowering of these fees because some lenders waive other charges like application and processing costs.
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