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Is there such thing as "No Cost" Refinance? The loan officer I used when I bought my house called me said now the rate is lower than 6 months ago, and refinance seems a good move. I asked him about the closing costs, and he said the lender can provide a credit to cover ALL closing costs, such as appraisal, lender title insurance, therefore I will not pay any out of pocket $ for refinance. I am thinking if this is real, then it is definitely beneficially to refinance at lower rate, even if it is such a small decrease in rate. Do I miss anything here? Any other hidden costs that the loan officer may not disclose?
Also, I know lender always wants lender's title insurance, but do I need to buy owner's title insurance again for refinance? Is is necessary to hire a real estate lawyer for refinance?
Even though a closing may have no out-of-pocket costs paid by you, those fees (and possibly a loan origination commission) are still there and paid by the lender ... hidden in the loan re-fi.
Your accountant is likely your best resource to analyze and quantify any possible re-fi benefit to you at this time. Generally speaking, if the interest rate drop is very minor, it's unlikely that you'll get much, if any, real net benefit.
A "no cost" Refi generally comes in two varieties or a combination of both. 1) The cost of the refi is rolled back into your new loan 2) You are charged a higher rate than the going rate. With rates at 3.6% the no cost refi rate would probably be 4%. We bought our house in 2011 and got a rate of 5.25% in 2012 we got a no cost refi @4%. Rolled about $2500 into the loan and lowered my payment by $159 a month. After just spending $70,000 the year prior on down payment and closing cost I didn't want to spend another $2500 to refi so this worked for us.
My mortgage holder does no cost refi's and I've taken advantage many times over the course of homeownership. There is one fee, the cost of the credit report (they always send a copy to me since I paid for it) which is refunded upon closure. The interest rate is probably slightly higher than the best rate going, but pretty much on par with "average" rates at the time. They make their money by extending the length of the loan, which most people just set back to 30 years from wherever you were. Saving $x per month usually trumps the long term cost, especially when people are stretched thin with their finances.
If buy a widget that cost $100 and the seller refunds you $100, it is a "no cost" transaction?
If you get a $100,000 loan and it cost your $2,000 but the lender credits you $2,000 and you have a payment $450, but if you had paid $2,000 and not gotten a credit back, your payment would be $440, did you get a "no cost" loan?
If buy a widget that cost $100 and the seller refunds you $100, it is a "no cost" transaction?
If you get a $100,000 loan and it cost your $2,000 but the lender credits you $2,000 and you have a payment $450, but if you had paid $2,000 and not gotten a credit back, your payment would be $440, did you get a "no cost" loan?
This little ploy is right up there with the old side-show come-on, "Buyers' Agents Work for FREE!"
OTOH, if a homeowner can refi and reduce the monthly cash outlay significantly without reaching into their pocket to get the loan, it certainly looks and feels like a "no cost" deal in the monthly budget if one digs no deeper into the transaction. So, people pitch and sell what other people want to hear.
I went to a "Get Rich Flipping Houses at NO Cost" sales pitch this week, and once again confirmed that a nugget of truth often conceals a vein of lies.
"Fools' Gold."
Sadly, most people don't have a clue how the mortgage system works, including many "experts".
A loan can be made as "no cost to you", but you pay a higher rate than if you were paying the cost directly.
It can happen because the bulk of the cost is paid by someone other than you. Here is why it happens:
The mortgages are not carried by the bank that originated them. They are put into a "bucket" with hundreds of other mortgages, then the bucket is sold for more than the value of the loans because the buyer wants the interest rate that is generated on the bucket.
You have the right to pay off your loan early. So, for instance, you owe $100, but someone else bought the loan for $104, because of the interest rate you are paying. That person is hoping you won't pay off the $100 immediately, because if you do he will lose the extra money he paid.
If the bank does a refinancing deal with you, they can give you a rate that is lower than your current rate without charging you any money on the transaction itself. For instance, if your current rate was 6%, and the market rate was 4%, the bank may happily offer to write you a new loan at 5% and not charge you for their costs incurred in the process. The bank would make their money off of paying off your old loan at $100 and selling the new loan for $104. The difference in the value of the loan that was paid off and the amount the new loan can be sold for is the amount of money that the bank captures in the deal.
Most people have absolutely no reason to understand those inner workings because they are not financial analysts that cover mREITs. (Mortgage Real Estate Investment Trusts) I am one of the people that covers those companies every week. The mREIT is the company that is buying the bucket of mortgages and collecting the interest payments. When you use the refinancing, you are paying off the loan they are holding. They will have to buy new loans to keep their business running. It is a viable business model, but I won't go any further in depth because I'm on here to relax, not to work.
I didn't do an absolutely "no cost" refinance, but I dropped my rate with my local credit union from 4.25% to 2.75% with a single sheet of paper and a one-time processing fee of $800. My loan was also kept in-house and always will be (one of the reasons I financed with them in the first place.) It was really a slam dunk deal for me.
There is always a cost!!!! What they are probably meaning is no out of pocket up front costs. They can roll the cost of the refi into your mortgage. So you will end up owing a few thousand more then you do now, however you might save that much in the next few years by the lower interest you are being charged. Refi's are only good if your going to live in your home long enough to recoup the cost of the refi.
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