Refinance No Closing Costs

Are you considering one of those refinance no closing costs home loans? Are lenders that boast refinance no closing costs home loans telling you the truth or can falling for one of result in overpaying thousands of dollars? Here are several tips to help you make an informed decision before taking out a refinance no closing costs mortgage loan.

Refinance No Closing Costs Home Loans

Taking out a new home loan to buy or refinance your existing mortgage loan costs thousands of dollars in lender fees and closing costs. Refinance no closing costs sounds like a great deal; however, you’re probably familiar with the saying “there are no free lunches” and the same is true of your home mortgage loan. I mean why would lenders offer refinance no closing costs options unless there was something in it for them?

What your lender isn’t telling you about that refinance no closing costs home loan is that you’re trading paying a few thousand dollars in closing costs for a higher mortgage rate and higher payments for the entire duration of your home loan. The following will illustrate why these home loans are a bad idea.

Unnecessary Mortgage Rate Markup

Mortgage originators get paid for the work they do arranging your home loan in a number of ways. These brokers, companies, or websites charge you an origination fee for the work they do on your home loan, which appears on your Good Faith Estimate as a percentage of your home loan amount. They can also collect a fee paid by the mortgage lender for marking up your mortgage interest rate, with or without your consent. This fee is what’s used to pay your closing costs in the case of a refinance no closing costs home loan offer.

The Hidden Truth About No Closing Costs

The fact that you’re not paying closing costs or an origination fee does not change that the person arranging your refinance no closing costs home loan is going to get paid for their work. It just means that someone else is paying the origination fee for you. What’s wrong with that you ask? Refinance no closing costs when someone else is paying the origination fee has to be a good deal…what could possibly go wrong?

The problem is that your lender is paying your closing costs and origination fee in exchange for a higher mortgage rate. The fee lenders pay for locking and closing your refinance no closing costs home loan with a higher mortgage rate is called Yield Spread Premium and always results in paying a higher than necessary mortgage payments for the entire duration of your home loan.

Yield Spread Premium in Action

Here’s an example to illustrate the effect of this markup for your refinance no closing costs home loan. Suppose you’re refinancing your home loan for $315,000 and your broker quotes you a refinance no closing costs rate of 6.75%. While you won’t have to pay the loan origination fee or other closing costs, (a typical loan origination fee is one percent of your home loan amount or $3,150 in this case) what your broker isn’t telling you is that you could have had a 6.0% mortgage rate had you paid your origination fees and closing costs up front.

How does this higher than necessary mortgage rate affect your monthly payments? In this example the payment on a 30-year, fixed-rate home loan would cost you $2,043 a month. If you had paid your closing costs and gotten the mortgage rate you deserve at 6.0% your payment would only be $1,888. That’s a difference of $155 per month or $1,860 every year that you’re paying unnecessarily.

In just five years that origination fee of $3,150 that you avoided paying with a refinance no closing costs home loan will cost you a whopping $9,300, In ten years you’re out $18,600…I think you get the picture why these loans are a bad idea. It’s always best to pay your closing costs up front and avoid the Yield Spread Premium that comes with refinance no closing costs home loan offers.