No Cost Refinance Loans

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 an 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 without any upfront fees, including typical costs such as an appraisal fee, title/escrow fees, loan origination points, and so on.

But 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.

Mortgage brokers can also setup a no cost refinance for you, adjusting their yield-spread premium to a 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 tradeoff may be a lower interest rate.

With a "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 $2,500 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.

But if you plan to stay in the home for 5 or more years, it would make sense to pay a little 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.

Please give me a call with your mortgage needs. I want to work with and for you to find the loan that will benefit you.

Arnold Cohen
The Mortgage Store
303-488-5435

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