You’ve likely heard radio commercials and received direct mail solicitations from mortgage companies offering “No Closing Cost Refinancing” and slinging promises of no attorney fees, zero appraisal costs, no lender fees and more. Too good to be true? No cost refinancing refers to a loan program in which a homeowner refinances the remainder of their mortgage balance without having to pay any fees or closing costs upfront (at closing). Upfront, is the key word. After all, you appraiser, lender, and attorney are not going to spend hours working our your loan without being compensated.
Here’s how it works:
Some people argue that there’s no such thing as a “no cost loan,” and they aren’t exactly wrong. All loans produce a certain amount of work and risk for the lender. In order to make it worth their while, lenders charge interest, fees and closing costs. Typical closing costs may include items such as title searches, title insurance, courier fees, recording fees, attorney fees and so on. In a no cost refinance, the lender foots the bill for these fees, but charges you a higher interest rate to make up for it. In other words, the borrower is paying for the fees in the form of a higher rate.
So, is it worth it?
It’s important to carefully evaluate your situation and the potential overall savings before plunging into a no cost refinance. If you think you can pay off the loan in a short amount of time, the no cost refinance can be a great deal. If paying off your mortgage in such a short period of time is unrealistic, then you’ll want to compare the costs of a traditional refinance with expenses, and possibly discount points, being on the table.
So, how do you figure it out? Ask your mortgage professional to break down the payments and closing costs associated with the various coupons (rate increments) they are offering. For example, a rate of 3.375% might carry $2500 in fees, 3.625% might have $1500, and 3.75% $250, and 4.000% might give you a $1,500 credit (enough to cover most of the refinancing charges). Then, ask the lender or broker to give you monthly payments for each coupon (rate) and a the number of years and months it will take you to recoup the closing costs if you elect to pay the closing costs out of pocket. By taking the time to review these numbers, you’ll gain better insight as to whether a no closing cost refinance is actually the best case scenario for your unique situation. And, be aware that rate coupons do not have uniform costs and/or credits. For instance, certain rates may offer minor credits while others may offer large incremental jumps.
Running the Numbers
For Example (for illustrative purposes only – ask your lender or broker for a breakdown of today’s rates and closing costs):
3.875% = May cost $1,200 + 3rd Party Closing Costs to Obtain
4.000% = May cost $500 + 3rd Party Closing Costs to Obtain
4.125% = May cost $250 + 3rd Party Closing Costs to Obtain
4.250% = May result in $100 Credited Toward 3rd Party Closing Costs
4.375% = May result in $1000 Credited Toward 3rd Party Closing Costs
You can see that the dollar amounts of the credits and/or points does not move uniformly between eights in the rates (coupons). Confused? That’s what your mortgage professional should be there for….to help you make a well informed decision. You can always print out a copy of this post and bring it in to your mortgage professional and ask him or her to explain it to you in greater detail. Best of luck getting a good deal on your next home loan.