Over recent years you may have often seen ‘No Cost Refinances’ advertised for mortgage loans. Do they really exist and if so how do they work?
Yes, no cost refinances for home loans do exist and they are a great way to save money by lowering your interest without having to add more to your balance or come up with cash out of your pocket. When mortgage lenders and banks make mortgage loans they then turn around and sell the loans that are turned into mortgage back securities or sell the servicing rights. The investors that take on these loans either charge a fee for taking on the loan or pay out a fee for originating it depending on what interest rate the loan carries. When they charge a fee because the interest rate is too low, this is passed onto the borrower. However when they pay out compensation this generally goes to the company that originated the loan to cover their overhead and pay their staff. Mortgage originators can make money either when they are paid like this or they charge borrowers an origination or mortgage broker fee. Some mortgage companies, banks and loan officers have often made money on both sides of transaction simultaneously. However, those who are not greedy and believe in offering a great service for fair compensation are able to provide no cost refinances. They do this by paying your closing costs from the compensation they receive from investors. For example if a mortgage originator receives 2% of the loan amount on a loan of $250,000 in compensation from a lender for doing your loan then they can easily pay out $2,500 to cover the closing costs associated with closing your loan and still cover their own overhead.
However, you must pay attention to what different companies mean when they advertise ‘No Cost Refinancing’. There have been some mortgage lenders who have made this claim and have only meant that they are not going to charge you an origination or broker fee themselves. Yet, they still charge many inflated third party fees for items such as credit reports, appraisals, underwriting, processing and title work. Though if you look you will also find mortgage companies that are willing to really cover all of your closing costs and provide true no cost refinancing. Keep in mind that the ability to provide truly no cost mortgage loans is dependent on the interest rate on your loan and the loan amount. There are some closing costs that vary depending on the size of the loan you need, but others are fixed costs regardless of your loan amount. Generally this means that the larger the loan you need the more chance you can qualify for a true no cost refinance.
There is no doubt that mortgage rates are currently at historical lows, so if you have been contemplating taking advantage of the great savings available then look for mortgage companies and lenders that offer no cost refinances. Before committing to anything make sure you receive a Good Faith Estimate that will show you exactly what costs are involved if any. Do not be afraid to ask questions. A good loan officer or mortgage planner will be happy to explain everything in detail and help you understands the pros and cons of different loan options.