Are no cost Refinance offers a good deal or just another way for mortgage lenders to hoodwink you? I know mortgage refinance fees can be frustrating and the temptation to roll them into the balance or “let someone else pay” can be overwhelming. Here’s the bottom line on the no cost refinance myth which could save you from an expensive mistake.
Lower Refinance Rates vs. Higher Mortgage Fees
Have you heard the saying “There’s no such thing as a free lunch?” Unfortunately there’s no such thing as no cost refinancing. These no fee refinance loans are just clever marketing designed to sell you an overpriced mortgage loan.
Every mortgage loan comes with fees; it doesn’t matter if you’re purchasing or refinancing. If your lender requires an appraisal the person doing the work needs to be paid. If an attorney is involved there will be attorney fees. Brokers and direct lenders all charge loan origination fees. If you don’t have the cash to pay these fees there are options available to you; however, tread carefully if you want to avoid an expensive mistake.
In the real world refinancing your mortgage is going to cost money, so how is it that lenders advertise no fee refinance offers? Like the leprechaun’s pot at the end of the rainbow no cost refinance loans simply don’t exist.
What are no cost refinance offers really?
What mortgage lenders are really offering with the no cost refinance is a mortgage with no out-of-pocket costs. This is accomplished either by rolling all of your closing costs into the mortgage balance, (meaning you’ll owe more after refinancing) or by jacking up your refinance rates in exchange for the lender paying your fees.
Are you okay with rolling an additional $5,000 into your mortgage balance to lower your payment by a hundred dollars a month? For some this is not a bad option. Just to be clear this is not a no fee refinance. Your mortgage balance went up meaning you’re paying more over time for the financing.
You get an above market refinance rate
The next option for your no cost refinance loan is taking a higher than market refinance rate to cover your closing costs. Mortgage lenders pay cash for closing home loans with higher than market interest rates and this cash can be used to pay your loan origination fee and other closing costs.
This is the so-called lender credit you’ll find accompanying many no fee refinance offers. If you take higher refinance rates in exchange for having your out-of-pocket fees paid, you’ve protected your mortgage balance from going up; however, your monthly payments will be higher. This option has the same closing costs as before, the difference is that someone else is paying them.
There are situations where this can be a great strategy for refinancing, especially if you’re not planning on staying in your home long. The problem is that your mortgage lender wasn’t born yesterday and most include some form of prepayment penalty to prevent you from refinancing again in the short-term.
Which is the better choice for refinancing your home? The answer depends on how long you plan on keeping your home and whether or not you have cash on hand to pay your closing cost. If your goal is to find the lowest refinance rates possible from today’s best mortgage lenders you’ll want to pay your out of pocket expenses yourself.
Yet another problem with no cost refinance deals
Are you thinking to yourself as you read this “the economy is crap… who has five grand to fork over to a mortgage lender?” If so, one common mortgage mistake is to write off your fees with one of these no fee refinance offers and not pay attention to what the lender is actually charging you.
Here’s the problem with this “ignorance is bliss” approach to no cost refinancing.
If you’re opting to roll your closing costs into your loan balance and aren’t paying attention that $5,000 in closing costs could quickly balloon up to $6,000, $8,000 or more. Section 800 of your Good Faith Estimate is filled with junk fees and discount points you can negotiate to pay less simply by asking. The more you pay closing on this type of no cost deal the higher your mortgage balance is going to be when all is said and done.
If you don’t want your mortgage balance going up and opt for higher than market refinance rates it’s going to be even harder to make sure you’re getting a good deal. The problem is that your refinance rates depend on how much you’re paying or overpaying at closing. Let’s stay that you negotiate your fees in this case down to $5,000. The lender pays one percent of your home loan for every .25 percent increase on your refinance rates.
Suppose you qualify for 4% with a zero point “no fee” refinance offer. You need $250,000 to refinance and in order to cover the $5,000 in closing costs you’ll need 2% of that mortgage balance which means higher refinance rates by .5%. (remember the cash from 1% of your balance costs you .25%)
What does this extra half percent do to your payments? Keep in mind that the more garbage-stuffed your fees the higher your refinance rates will need be to cover the closing costs.
If you had paid the closing costs yourself and walked away with 4% your monthly payment will be $1,193. Since you opted for the “no fee” refinance loan and your interest rate is 4.5% your payment will be $1,267. That’s a difference of $74 a month or $888 a year.
Let me put this in perspective, in six short years you’ll have paid $5,328 for $5,000 worth of closing costs. After ten years you’ll have paid $8,880 for that $5,000. You get the point.
Remember if you’re thinking “I’ll just refinance again and come out ahead” that your lender wasn’t born yesterday and will surely have a prepayment penalty buried in the fine print.
How to pay less refinancing your home
It doesn’t matter if you opt for a no fee refinance offer or pay your closing costs yourself, the less you pay at closing the better off you are.
This is where shopping for the lowest refinance rates and fees can save you a boatload.
I know, shopping for the best mortgage lenders is a pain in your keester but so are taxes and there’s no getting around that. Do you know which fees you’re stuck paying, which can be negotiated, and which are pure garbage?
I can show you for the small investment of less than an hour of your time.
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