Avoid a No-Cost Florida Home Loan in Today’s Housing Market
Not everyone can afford a lot of money up front when looking to purchase property. That’s why there are Florida home loan options that don’t require a down payment. But are these mortgages a good idea?
No-cost Florida home loans are popular with home buyers trying to scrape together enough cash to make an offer. Now that the cost of mortgage money is rising, however, it makes sense to re-evaluate this financing strategy.
Problems with a no-cost Florida home loan
What does it actually mean to have “no cost?” The borrower may pay few, if any, upfront fees, butlike points, these fees are later added to the cost of the mortgage. The cost is simply reflected in a higher Florida home loan rate.
There is an inverse relationship between points and the mortgage interest rate. The more points you pay, the lower the interest rate. If you were to pay one point, you’d buy the interest rate down 0.25 percent in relationship to a borrower who chooses to pay no points. For a no-point Florida home loan, your interest rate will be approximately 0.25 percent higher.
A no-down payment Florida mortgage was an attractive option when interest rates on fixed-rate financing were under 6 percent. Now that rates are moving higher, paying points may make more sense, particularly if you’re buying for the long-term.
HOUSE HUNTING TIP: To arrive at the break-even point when comparing a no-point loan to one with points, divide the points, or $5,000 in this example, by the annual difference in monthly payment, or $918. The result is the length of time in years that you need to keep the loan to make it worthwhile to pay points.
Long-term vs. short-term Florida home loan
Keep in mind that paying points can be an unnecessary expense for buyers who purchase for the short term. You would also come out ahead with a no-point loan if interest rates were to decline over the next few years. In this case, you could refinance your Florida home loan into a lower interest rate mortgage.
In closing, if you’re short of cash and there are a lot of homes for sale that aren’t moving quickly, you might ask the seller to pay points for you. This strategy will have less chance of success in a city where listings are selling quickly - but that isn’t currently the case in the Florida housing market.
