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?

{ 20 comments… read them below or add one }

krantcents January 8, 2012 at 5:38 pm

You should be skeptical! There is no such thing as a free lunch! For comparison or search purposes you may want to try bankrate.com.

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Darwin January 8, 2012 at 6:16 pm

Of course I’ve been skeptical; that’s why I never even contemplated it before. But upon researching (and laying out the options/opportunities as I did above), where is the downside? It’s basically taking a higher rate than I could get otherwise to have a lender pay the fees. But that final rate (say, 3.5%) is way below my current rate!

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YFS January 8, 2012 at 5:50 pm

I recently refinanced my 30 year mortgage to a 15 year mortgage via a no-cost refinance. I actually received 4k back at closing due to incentives and kickbacks. I think it is definitely worth it! I went from a 5.25 30 year to a 3.375 15 year and got money back!. The lender I used was amerisave.com. They are a direct lender who can get your very low rates. My timing was a bit off when I locked that’s why I got the 3.375 instead of the 3.25 rate but it was still worth it.

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Darwin January 9, 2012 at 10:12 pm

Sounds like a great deal. Nice! And financing in extra cash at what is effectively a 3% interest rate (w interest deduction) is sweet. I think I’m probably pretty close to 80% on LTV so probably wouldn’t be able to take much cash out if any.

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Moneycone January 8, 2012 at 8:57 pm

I recently did a no-cost refi, I’ll post an update soon. You are right, there is no such thing as a free lunch!

But the more informed you are the better chances you have of not getting ripped off.

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Darwin January 9, 2012 at 10:13 pm

I figure the odds of getting ripped off on this are low since the variables are few. If there are no closing costs to me, my loan amount stays the same, the only possible variable is the interest rate itself which I’m shopping around.

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Tim January 8, 2012 at 9:17 pm

Darwin – I found this post from The Burning Platform. Thanks and good info. I’ve been looking at refinancing my current mortgage and this post has helped to push me off the fence. I went to Google to look up lending tree and found a page with lots and lots of complaints about Lending Tree. Before I fill out the forms, do you have any input on these complaints? Was your experience similar?

http://www.consumeraffairs.com/finance/lending_tree.html

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Darwin January 10, 2012 at 10:09 am

Thanks for the note Tim. I haven’t had any such problems really. I actually didn’t list my real phone number (it pisses me off beyond belief to have a bunch of telemarketers calling my cell). So, I just noted that I want to discuss via email and at the moment, I have a bunch of offers in my inbox. For the few that said, “Call to discuss”, so far I’ve ignored them. If they don’t want to quote me without the hassle of a call then they’re probably not offering the best rate :>

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Maggie@SquarePennies January 9, 2012 at 1:26 am

We did a no-cost refi and were happy with it. We used bankrate.com to find our lender, and you might want to phone a couple of lenders from their list to compare.

Our mortgage had dropped to the 9 years left level and no one wanted to make a refi with that short a term. We also needed a new car (my husband won’t buy a used car) to replace a 10 year-old vehicle. We ended up with a mortage for a 12 year term, fixed rate with the rate being much lower than our old one. We took cash out to buy the car & that helped raise the amount of the loan so a bank would even consider us. Again, in order to get the loan, we had to extend the term to 12 years for them to consider it. Our new mortgage payment was lower than before by about $200, we had a new car, and our rate was much lower. Every person’s situation is different, so I can’t say that our choice would be wise for everyone. It worked for us when were short on cash for a car.

Our home has been paid off for several years now, & our cash flow is much better since we’re not paying for college for our kids anymore!

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Darwin January 9, 2012 at 10:14 pm

For now I’ve been doing the email thing since I have over a dozen banks emailing me now and I don’t want to spend any time on the phone with them. To me, with just 1 key variable (the rate), I figure the consumer has all the power – just keep comparison shopping until ready to pull the trigger with the right rate as long as no gross complaints found on the firm.

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ParatrooperJJ January 9, 2012 at 12:22 pm

On of the reasons we see this is that by refinancing a homeowner signs a new morgage note, thereby erasing any problems with the old one (MERS).

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Darwin January 9, 2012 at 10:15 pm

Ha, good point. So many banks are probably trembling in their boots hoping for no further defaults since they may not be able to prove ownership. Hadn’t thought of that!

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JT January 9, 2012 at 7:20 pm

I’m not entirely in-tune with mortgages and their relationship to the tax code, but isn’t interest deductible where fees are not? In this case, a higher interest rate in lieu of fees would seem to me to be a better (after-tax) deal even if it isn’t before taxes.

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Darwin January 9, 2012 at 10:16 pm

Wow, that’s an added silver lining I hadn’t even contemplated. So, if 4K in fees out of pocket is non-deductible, by trading a quarter point, even if the NPV on that is say, 6K, it’s still a wash to just take the higher rate and the tax deduction to offset it.

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Jai Catalano January 9, 2012 at 8:57 pm

Wow that is great news to hear.

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Alex Morgan January 9, 2012 at 10:16 pm

Well JT’s tax reasoning adds another reason in support of your argument. Still, I have a hard time seeing the 0.25% being less than the closing costs in most cases. Plus the lower payment means more over that 15 years that you could put towards the principal rather than consider the several thousand dollars you saved at the start. Again, maybe with a 15 year loan it’s more likely to even out than it would over a 30 year loan. I commend you for taking the risk, I admit I’d see the lower percentage rate and the fees as the lower risk option!

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Tom January 13, 2012 at 6:05 pm

On the surface, the lowest rate seems to be the logical choice…but looking deeper, here’s some questions to ask your loan officer that will give you a better understanding of which choice is best for you.

1. How long (from underwriting to closing) is the loan process with your company. If it’s longer than 30 days, you’ll be forced to do a 45-60 lock (more expensive than 30 days)
2. Are you a banker or broker? If banker, then they only have their products and rates to offer. You’ll be working with a captive loan officer that has no flexibility when choosing the best end investor…
3. Do you offer both No-Cost Refi’s and Borrower Paid Refi’s? The trend today is No Cost, but a big reason is that mortgage companies are not allowing their loan officers to offer borrower paid transaction options!
3. Does your lender/investor have “overlays”? 95% of all loans are being bought by Fannie Mae or Freddie Mac. Often lenders include overlays which means more conditions (stipulations) that you must meet – more work and time for you.

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Melissa January 17, 2012 at 11:15 pm

I completed a no-cost refi in December. It was a 30 year loan, 3.875%. I actually got about a $500 credit. Or I could have gotten a 30 year, 3.75% and paid about $500 in closing costs. One thing I noticed about the lender I went with is they didn’t mail me payment coupons until after my first payment was due. Kind of shady, but I work in the mortgage industry, so I know how to be on top of things.

We actually decided to refi from a 3.75% 15 year mortgage to a 3.875% 30 year mortgage since we’re thinking about renting our current house out and buying a new primary residence sometime and we wanted to refi while we were still in an owner occupied situation

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Jackie January 25, 2012 at 9:15 pm

We’ve done no-cost refis twice in the past few years — and both time we actually got very good rates. I highly recommend Pentagon Federal Credit Union, which is where we did ours. It’s very easy to become a member there too, just by paying like $15 or so to join one of their qualifying organizations.

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Jeff January 6, 2013 at 7:41 pm

I have PenFed now for a fixed rate mortgage but when looking at their site I didn’t see any no-cost fixed rate options—what did I miss?

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