Closing Cash Saver Mortgage and Refinance

Closing Cash Saver(CCS) loans allow you to avoid non-recurring closing costs by selecting a slightly higher interest rate. When you choose a CCS loan you receive a rebate that will pay your non-recurring closing costs, allowing you to close with less money up-front.

Closing costs that are commonly paid by CCS loans include title and escrow fees, appraisal, lender fees, credit report fees, and other expenses which are non-recurring over the life of the loan. As with all loans of this type (sometimes incorrectly referred to as "no-cost" or "no closing cost" loans) the prepayment of recurring costs will still be required at closing, regardless of the lender you use.

With home financing there are usually a variety of interest rate and point combinations available to the borrower for each product or loan type. While some borrowers prefer a lower rate immediately, others prefer minimizing their up-front expenses. For these borrowers, the CCS option is preferable despite the higher interest rate, because it requires the smallest investment at closing.

CCS loans can be used for both refinance and purchase transactions. In general, a CCS loan is a good strategy if you plan to keep your loan for up to three years. Beyond that you should consider paying some costs out of pocket to get a lower rate, since over time the lower mortgage payment will offset the additional up-front costs.

CCS Refinances

CCS loans are most commonly associated with refinances. A CCS refinance is the quickest way to generate immediate interest rate and payment savings with no up-front investment in closing costs. For instance, imagine that a borrower is currently at 8.5% on a 30-year fixed rate loan and is interested in refinancing at a lower rate. If this borrower chooses to refinance using the CCS method, it doesn't matter when they lock in so long as they immediately save money by refinancing. For example, with an 8.25% CCS loan, their payment would decrease right away. And should interest rates continue to decline, the borrower can simply refinance again to obtain additional savings.

Tax Issues - Refinance

A CCS loan will not have points, and thus there is no deduction for that cost. However, the lost deduction is trivial. In a refinance transaction, points must be amortized over the life of the loan. For example, on a 30-year loan, you can deduct 1/30th of the points paid each year. If you refinance for a second time, however, you can deduct the non-amortized points in the year you refinance the loan. Consult your tax advisor for more information.

CCS Purchases

With a purchase transaction a CCS option can work extremely well when the borrower has limited funds available for closing or when interest rates are declining and the borrower may want to refinance quickly. CCS loans can be used effectively to free up more cash for the down payment or to save for repairs or other uses.

Tax Issues - Purchases

While many people assume that buyers should pay points to obtain a tax deduction, this is not always true. Of course,tax deductibility is an important consideration, but it is only one factor to be weighed. Paying points up-front to secure a low rate in an environment with declining interest rates could be unwise. If you decide to refinance shortly after a purchase, the up-front points and costs would have been wasted.

Copyright © 2005 E-LOAN, Inc. All rights reserved.
This article is being provided solely for informational purposes, and the views and opinions expressed therein are solely of the author or authors alone. Such views and opinions do not necessarily represent or reflect the views and opinions of E-Loan, Inc., its directors or employees, or any entity affiliated with it. Obtaining a refinance loan with a term greater than the term of your existing loan may increase the time and/or total amount needed to repay your debt.