No Cost Refinance – A No-Lose Financial Move?

by Darwin on January 8, 2012

no-cost-refinance-companies

A no-cost refi is starting to make more sense to me now that I’ve read more about it, and I was especially surprised to see the number of no-cost refinance companies out there.  I’ve been contemplating a refi for some time now and had initially put it off due to the exorbitant fees involved in refinancing (thousands of dollars in title checks, lender’s fees, etc.).  However, by pushing all the fees onto the lender (albeit at a slightly higher rate than I’d get if I fronted the costs), I can have my cake and eat it to – as long as the term and rate work out in my favor.  A no-cost refinance isn’t for everybody, but here’s why I thought it might make sense for me at today’s historically low rates.

Current Mortgage:

  • Loan Amount: $320,000
  • Term: 30 Year Conventional (about 3 years in)
  • Interest Rate: 4.625%

No Cost Refi Rates

I started off my search by going through a few “interest lender lists” by just filling out a few bits of info with  Lending Tree and Bills.com and within minutes I got a dozen auto emails from banks in my area.  Additionally, you can see real-time rates for your state at this rate table.  I copied and pasted the same email to all of them which you can feel free to use or alter yourself:

 

Do you offer “no-cost” and “no-cash” refi options? I would like quotes on having NO out of pocket expenses at closing, so either adding the closing costs to back-end of loan AND/OR quote for having lender bear all fees at closing and having same loan amount (but rate is usually higher for this option). Please only revert with quotes for those options. I am good on credit, LTV, etc. Thanks

I was getting quotes from 3.25% for a conventional 15 Year Refinance to a 3.5% rate with all the closing costs built in.  To me, if I’m looking to refinance down from a 4.625% rate anyway and I can take a 3.5% rate with NO closing costs to me, sounds like a win, right?  The downside is, technically, perhaps I could have won out with a better “NPV” if I just paid the closing costs myself now and enjoyed the additional .25% discount over 15 years.  But after the number of refinances I’ve done with out of pocket costs and my other investment opportunities, I’d much rather just hang on to my cash, start paying down my mortgage more quickly and move on.

The nice thing about comparing the no cost refi options is that it’s easy!  Traditionally, you had to look at various closing costs, rates, points, etc. and try to figure out which loan had the best NPV (net present value) since there were multiple variables.  Here, with a known mortgage amount, no out of pocket expenses and the same terms to compare, it’s as simple as who will give you the lowest rate.  Again, there are probably many refi outfits displayed in typical ad boxes you’ll see on the web, or you can get one consolidated list with auto-emails through just opening 3 browser windows and using Lending Tree, Bills.com and this table of current rates.  Within minutes, you’ll have dozens of apples-to-apples comparisons.

Difference Between a No Cost and a No Cash Refi

Since there are different terms to describe the various loan options out there, it’s important to confirm with prospective lenders exactly what you’re looking for, get it in writing with a GFE (good faith estimate) and then confirm everything checks out with them before closing (do some google searches, check BBB, etc.).

  • A No-Cost Refi is as described above, where the going rate on a 15 year loan might be say, 3.25%.  Well, if I’m going to incur $5,000 in closing costs, they agree to front the funds and I pay nothing out of pocket at close.  Additionally when I start the new loan, my loan amount will be exactly the same as prior (i.e. ensure they didn’t tack those costs onto the new loan).  In order for them to justify eating the $5,000 in costs though, they must charge a higher rate.  So, perhaps it’s 3.5% on the 15-year.  Now, when I’m looking at my existing loan with a longer duration and a higher rate at 4.625%, I’ll take the 3.5% right?  It’s no cost to me either up-front OR in my principal owed and the rate is lower.  The only downside is the higher monthly payment which is a risk I have to assess given my employment situation and personal finances.

 

  • A No-Cash Refi on the other hand, is one where they roll those closing costs onto the back of my loan, so if I owe $320,000 today, I’ll owe $325,000 under the new loan.  In that case, I’d expect that lower interest rate of 3.25% since they’re not really doing anything for me, right?  But I’ve heard of some situations where banks give you the higher rate anyway since you think you’re getting a deal.  If you’re already close to the 80% loan-to-value and don’t want to just take on more debt, the no-cost refinance option might be a better one than the no-cash refinance.

Again, here are the resources I used in my search: using Lending TreeBills.com and this table of current rates.

Have You Done a No-Cost Refi or No-Cash Refi?  Would you?

Do You Recommend Any Particular No-Cost Refinance Companies?

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