Monday, July 19, 2010
No Closing Cost
You may have seen ads for the “no cost refi” loan lately, a mortgage program that promises no fees or out-of-pocket expenses when you refinance your existing mortgage.
While this type of offer is by no means a new concept, it’s definitely a subject worth revisiting to ensure people understand what they’re getting when they choose a no cost refinance option.
A no cost refinance is essentially a loan transaction in which the lender or broker pays settlement costs, including typical fees such as processing and underwriting fees, appraisal fee, title/escrow fees, loan origination points, and so on.
A bank or lender may also bundle your closing costs on top of your loan amount, increasing the size of your loan, making it a “no-cash” loan. Though you may avoid out of pocket expenses and upfront fees, these costs are not lender paid and the loan is not a true no cost loan.
So how do banks and lenders make up for the absence of fees that normally must be paid?
The reality of the situation is that these types of loans will actually bump up your interest rate, sometimes dramatically in order to make up for the missing fees that are usually charged at closing.
Also note that no cost refinances will vary by lender, and some programs may cover all costs, while others may still charge you for certain third-party fees such as per diem interest, insurance, taxes, and even points!
Mortgage brokers can also setup a no cost refinance for you, adjusting their yield-spread premium to the point where they make enough money to offset the fees associated with the loan.
Let’s look at an example to illustrate the program:
Imagine that you’re credit profile allows you to qualify for a mortgage at an interest rate of 6% on a $500,000 loan, paying a point to the lender and another $2,500 in closing costs totaling $7,500. While this may seem like a large upfront cost, the trade off may be a lower interest rate.
With Countrywide’s “No Cost Refi” program you’ll cruise through the transaction without paying a dime, but you may end up with an interest rate of 6.5% or higher on the very same transaction.
Assuming you make the interest-only payment each month, you’ll pay an additional $200 a month, or roughly $2,400 annually if you select the “no cost refi” at an interest rate of 6.5%.
This is the point where you need to ask yourself what you plan to do with the property and the mortgage. If you’re planning on upgrading to a more expensive home in just a few years, or if you’re the type that refinances often, paying upfront costs for a lower interest rate may be a losing endeavor. For you, a no cost loan may be a good choice.
But if you plan to stay in the home for five or more years (or whenever the break-even point takes place), it would make sense to pay a little more upfront for future savings. After all, that $200 discount each month might ease your budgeting woes in the future, and amount to some serious savings if you stick with the mortgage for the long term.
Remember, no cost loans aren’t inherently good or bad. Their associated benefit or cost will really depend on your unique financial situation.
If you want to see if Refinancing makes financial sense please reply via email with the following information
1. Current Interest Rate
2. Current Loan Balance
3. Idea of Home Value from Assessment or Recent Appraisal
4. Current Monthly Payment
5. Yearly Taxes
6. Yearly Homeowners Insurance
7. Idea of Credit Score or Rating Fair-550-620 Good 620-680 Excellent 680 and above.
By sending an email back with the above information, I can then forward you an accurate idea of what your new payment would be if you decided to refinance. Not 1 phone call unless you prefer to discuss further.
I am an actual person so if you are interested in refinancing you can receive real time quotes and payment options by calling me directly. You can reach me, Gene Neal at 877-276-6400 Ext 101.