Are you considering a no cost refinance loan for your next home mortgage? You’ll see these refinance loans advertised by today’s best mortgage lenders and by most banks as an option at closing. If you’re strapped for cash the no cost refinance might seem like your only choice, but you should know what you’re giving up. Here’s the scoop about no cost refinance offers, how they really work and what you’re sacrificing in the long run to help you make an informed decision for your next home loan.
No Cost Refinance Lenders
No cost refinance can mean different things depending on your needs. First, let me tell you what a no cost refinance is not. There is no such thing as a free mortgage refinance…period. Every home loan has fees, origination and underwriting costs that have to get paid by someone. The question for the truth about no cost refinance offers is who’s paying the fees and in exchange for what?
There are two types of no cost refinance mortgage loans. There are “no cash out-of-pocket” refinance rates, meaning you’re not required to plunk down your cash at closing because all of the refinance fees are being rolled into your loan balance, and there are true “no cost” refinance rates where the fees are being paid by someone else, in this case the lender.
Why Would Mortgage Lenders Pay Your No Cost Refinance Fees?
Simply put, what’s in it for them? Mortgage lenders don’t do anything out of the goodness of their hearts (do they even have a heart?) so why on earth would they pay your no cost refinance fees?
The truth comes down to how mortgage lenders make their money, think profits. It might surprise some homeowners to learn that most lenders don’t profit by sitting back and collecting the interest from your payments, especially with today’s current refinance rates.
Lenders profit by selling home loans to investors. Home loans with higher than market refinance rates bring in the most profit. One way lenders get homeowners to agree to higher than current mortgage refinance rates is by offering no cost refinance loans.
In exchange for agreeing to higher than current refinance rates the lender pays your loan origination fee, mortgage underwriting fees and other closing costs. You get a no cost refinance with no cash out of your pocket and your mortgage balance doesn’t go up as a consequence.
Sounds like that no cost refinance is a great idea right? Remember, your payments are based on the term-length you choose and how low your refinance rates are. While you can control both, the higher your refinance rates the more cash comes out of your pocket every month for the entire time you keep the mortgage.
How Much Higher Will Your Refinance Rates Go?
The answer depends on how much you agree to pay at closing. One common mortgage mistake with no cost refinance offers is neglecting to comparison shop lender fees. If you go into refinancing thinking that the closing costs you agree to don’t matter because the lender is paying, you’re going to get screwed no matter what.
No cost refinance offers work like discount points in reverse. Remember that a discount point is a fee you pay to buy down your refinance rates. If you pay one point, one percent of your home loan amount, you’ll typically lower your refinance rates by .25%. Well, the no cost refinance offers generate a credit of one percent of your mortgage amount for every .25% you allow the lender to mark up your refinance rates.
Can you see how these no cost refinance loans work like discount points in reverse?
How much your refinance rates go up depends on how much your actual closing costs are; the better you shop around the less markup you’ll need to cover lender fees. This also means your payments will be lower than the neighbor that didn’t do their homework and blindly accepted whatever fees the lender required, figuring “heck, the lender’s paying so whatever.”
Mortgage Refinance Fees Matter
The truth is regardless of how low your refinance rates are the fees you pay refinancing your home loan make or break the deal you’re getting.
With no cost refinance offers the fees that your lender pays are responsible for how much your payment goes up. Pay less at closing and not only will you get more benefit from today’s low refinance rates but you’ll have more cash in your pocket at the end of the month.
How to Pay Less For Mortgage Refinancing
Fortunately, shopping for the best refinance mortgage rates AND fees is not difficult if you go about it the right way. The government recently overhauled the Good Faith Estimate making it a much more effective comparison shopping tool. (It used to be completely useless)
The secret to getting the lowest rates and closing costs is how you use the new Good Faith Estimate for your refinance mortgage rates comparison shopping. First, watch out for quotes that include discount points.
Discount points make lenders a boatload of cash from unsuspecting homeowners. It made sense to pay points in the 1980s when people were getting double-digit mortgage refinance rates. Today it’s just a waste of your cash.
Make sure when you’re requesting quotes that the mortgage refinance rates DO NOT include discount points. If you’re curious about how paying this mortgage fee affects your payments there is a table on page three of the Good Faith Estimate, but always start with zero point quotes.
Watch Out For No Cost Refinance Fees
Sounds like a contradiction right? Not cost refinance loans don’t have fees right? Wrong! Remember your payment amount is going up by the amount the lender is paying for you. You want the smallest increase in the best refinance rates possible.
Focus on the mortgage lender fees found on page two of your Good Faith Estimate starting with the loan origination fee. This is paid to the person or company arranging your mortgage refinance. Many brokers will tell you that one percent is standard; however, I’ve reviewed community and military credit unions that offer no cost refinance loans with loan origination fees as low as $400.
If you take one thing away from reading this today it should be that the closing costs from your no cost refinance make or break the deal you’re getting. The less you agree to in mortgage fees the more benefit you’ll get from today’s best refinance rates.
Page Two Of Your Good Faith Estimate Is A Goldmine
As I mentioned the new Good Faith Estimate is the best thing Uncle Sam has done for refinance rate shoppers well, ever. If you’re interested in a no cost refinance you’ll find the credit being generated to cover your mortgage fees in box 2a. You want this credit to be as low as possible while still covering your closing costs so your monthly payment doesn’t go up any more than necessary.
Section B on page two of the Good Faith Estimate includes lender fees you can shop around for and third party fees. Comparing these fees from a variety of banks, lenders, and credit unions will give you a good baseline for what is reasonable. Don’t be afraid to haggle over fees found on page two of your Good Faith Estimate. Mortgage brokers, banks and credit unions are a dime a dozen so if you’re getting pushback from a loan officer simply scratch them off your list.
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