No Closing Cost Mortgage Refinance

Knowing terminology when considering a no closing cost mortgage refinance can be extremely important. A no cost loan is not the same as one where the buyer has no out-of-pocket costs due at closing. In the latter scenario, the additional costs are simply inserted into the loan amount, so the buyer is still paying for them. In fact, because of interest costs, the buyer is actually paying more money than if he or she had merely paid these costs at settlement time! When Jesus sent the disciples out to preach, He told them to be as ...wise as serpents and harmless as doves. (Matthew 10:16). Likewise, those shopping for refinancing deals need to be informed yet honest and respectful as they deal with those in the financial profession.

Another deceptively similar term is a no fee loan. Believe it or not, this does not mean that the buyer will not have to pay any fees during the process of closing on a loan. It simply means that the lender is willing to absorb charges for certain fees, sometimes called 'garbage fees'. Garbage fees are things like document fees, administration fees, or any type of processing fees. They are somewhat 'nonsense' fees, seemingly mostly tacked on to increase the lender's profits. Simply removing these fees does not make the loan a no closing cost mortgage refinance either.

What, then, is a true no closing cost mortgage refinance? In order to answer that question, first take a look at the fact that all loans have costs associated with them. Basically, there are two kinds of costs: recurring and non-recurring. Non-recurring closing costs (NRCCs) include fees for appraisal, credit check, title, escrow items, notary/recording charges, underwriting and the above-mentioned 'garbage fees'. Points are sometimes included in this category. Prepaying points is like paying the interest on a loan ahead of time. Points are sometimes called discount points or origination fees. Discount fees are paid to the one who is actually funding the loan, while origination fees go to the broker who is processing the loan. A point is 1% of the total loan amount. On a 200,000 loan, a single point would cost $2000. Two points would cost $4000. Except for these points, the non-recurring costs are known as the borower's base closing costs. Many times, in a refinancing situation, the lender will pay for NRCCs. A seller could also provide a NRCC credit to help cover the buyer's costs. Sellers do not pay for recurring costs.

Watch out for lenders who offer to 'pay' the NRCCs through what is known as a Yield Spread Premium (YSP). All this means is that the borrower's interest on the no closing cost mortgage refinance will be increased in order to cover these costs. If the lender raised the points a single point in order to cover closing costs, it would result in an interest rate increase of about .25%. Sometimes lenders will simply pocket any 'leftover' profit from the adjustment as additional profit from the loan.

Recurring costs usually involve current mortgage interest, property taxes and insurance. They usually are required at settlement, although in reality they are not considered part of the cost of obtaining the no closing cost mortgage refinance loan. In a way they are almost transitional fees, in that they take care of details in the period between the end of one loan and the beginning of another. However, these fees will continue, or 'recur', during the new loan, since the buyer will continue to pay interest costs, taxes and insurance.

Make sure that it is clearly spelled out just exactly what the no closing cost mortgage refinance means. Having a 'zero points' loan yet paying lender fees or third party expenses does not equal a no-cost loan. Having to pay 'zero fees' to the lender, yet being responsible for 'surprise' third party costs at settlement is likewise unacceptable. Advertising 'no cash' closings while piling fees into the total cost of the loan and then charging interest for this privilege is insulting the buyer's intelligence as well as costly for the borrower. In a true no closing cost mortgage refinance, the lender does not collect fees and pays certain settlement costs, but does not raise the amount of the loan in order to do so. Mortgage companies generally add on .5% to .75% for their own commission, so they will be compensated for their efforts without needing to add another .5% or more to the loan for closing costs. The latter situation will result in the buyer paying more each month for as long as he or she has the loan. This can add up to a sizeable amount over the course of the loan.

A buyer should determine to get a written estimate from several lenders before committing to any one of them. This is important for several reasons. First, a buyer will have a beginning point so that later, when he or she receives the final estimate (which is due at least three days before the closing date), costs can be compared and any additional elements explained. This also lets the lender know that the buyer is both informed and engaged in the process of shopping for the best rate. On the final estimate, the buyer can check to see that the only costs being paid for a no closing cost mortgage refinance are the recurring costs of interest, taxes and insurance. Make sure to receive a credit for any non-recurring costs listed in the final estimate. Remember to negotiate in a firm yet calm and pleasant manner.

Add to: File Insurance Business article Teen Photo Images