No Cost Home Refinance

A no cost home refinance may sound like an inexpensive way to refinance one's home mortgage to a lesser interest rate without paying any of the typical closing costs. But the phrase is actually misleading. There are several costs involved in both the initial financing and any refinancing of a piece of property. For example, the property needs to be appraised and someone has to pay the appraiser for providing this service. It doesn't just disappear. One way or another, the person who is refinancing his mortgage will be paying the closing costs. Instead of paying the closing costs upfront, though, the loan is arranged so that the closing cots and fees are included in the loan product. This can be done a couple different ways. So while it may be true that a no cost home refinance loan may sound like a bargain, the wise and prudent borrower will read all the fine print and understand the total costs involved before signing a new mortgage contract.

The standard rule of thumb for refinancing is that borrowers should consider taking this step when interest rates have dropped by two percentage points. For example, if a home owner has a mortgage with an interest rate of 8% and she can qualify for an interest rate of 6%, then she should begin shopping around for a new loan. In fact, she may want to start with the current lender to see if they will offer her any savings incentive, such as a no cost home refinance loan, in order to keep her as a customer. However, she will want to fully understand the hidden fees in the loan. Of course, another reason for staying with the current lender is that the application process may be quicker than starting over with a new company. The current lender already has a file on the borrower and the property that includes financial and market value information. Still, the home owner will want to consider other options, too, to ensure she is getting the most value for her money.

Typically, closing costs fall into three categories: points, lender fees, and third party fees. Points are expressed as a percentage point of the amount being financed. For example, one point for a $200,000 mortgage equates to $2,000. Discount points are prepaid interest. Lenders may charge discount points for lower interest rates while a no cost home refinance loan with zero points would have a higher interest rate. A lender's origination fee may also be expressed in points. Other lender fees include such items and services as application fees, document preparation, courier services, processing, and underwriting. Third party fees are for such items and services as the appraisal, obtaining the borrower's credit report from a credit reporting agency, pest inspections, title insurance, and any applicable government fees. All these costs have to be paid by someone which just goes to show that a no cost home refinance loan is more a marketing ploy than an accurate representation of facts. Jesus once sent his followers on a journey and warned them: "Behold, I send you forth as sheep in the midst of wolves: be ye therefore wise as serpents, and harmless as doves" (Matthew 10:16). The same warning applies when borrowing money, especially such a large sum as a mortgage. Borrowers need to be as well-informed as possible when making these kinds of financial decisions.

When lenders advertise no cost home refinance loan products, they may be offering a mortgage for no cash out of the borrower's pocket. Any points and both the lender fees and third party fees are bundled into the mortgage. For example, if refinancing the mortgage is $150,000 and all the closing costs added together are $6,000, then the borrower actually borrows $156,000. In this type of loan, the closing costs are subject to interest for the term of the loan or until the borrower pays off the mortgage or refinances again. Another option is for the borrower to accept a loan with a higher interest rate. The principal stays at $150,000 and the $6,000 is paid through the higher interest rate. Usually a no cost home refinance loan of this type will be anywhere from a quarter to a half percent higher than the lowest rate, though it may be even a whole point higher in some instances. In making decisions on whether to pay the lowest interest rate or a higher interest rate in exchange for lower closing costs, experts suggest that borrowers think about the future. If the borrower intends to stay in the home for a long time, she may want to pay closing costs upfront when refinancing. However, if the borrower plans to sell or refinance again in three to five years, then it may be prudent to roll the closing costs into the new mortgage. The borrower can divide the cost of refinancing by the monthly savings to see how long it will take her to break even. This simple calculation may be the key to determining which loan product best serves her current needs.

Other loan options are for the borrower to pay no points, but to pay the lender and third party fees. Or the borrower may pay the third party fees, but not the lender fees. When the mortgage broker tells a borrower that lender fees are being paid, it may be that the broker is receiving what is known as a yield spread premium from the lender. The lender gives the broker the yield spread premium, which is also known as a gain on sale incentive, for using that lender's services and bringing business to that particular company. This is another way that no cost home refinance products work, but this type of situation requires diligence on the part of the borrower. After all, the borrower wants to be sure that the broker is more concerned with her interests and getting her the best possible refinancing product than with getting incentives from lenders that line his own pockets. This is just another reason why it's so important to shop around, to check on a company's reputation with the Better Business Bureau, and to read online customer reviews of different companies before choosing who will get one's refinancing business.


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