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Health & Fitness

No-Cost Refinance

I wrote an article back in May regarding common mortgage mistakes many homeowners make.  One of the topics had to do with no-cost refinancing as a bad idea.  I touched on the subject, and as interest rates begin to rise, I would like to spend additional time reviewing this "mistake".

 

I have been a big proponent of no-cost refinances for many years, so much so that the majority of my refinance business is no-cost or next to no-cost.  I honestly believe that all of my past clients who have received a no-cost refinance from me have been well informed, completely happy, and most importantly better off financially.  I have given them the lowest possible rates which we repeated many times as rates continued down.  They also received peace of mind to sell their homes or refinance again knowing there was no break-even point to recoup their costs.  Why wait at a higher rate for the lowest possible rate, when you can wait at a lower rate for the lowest possible rate over and over again.

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As in most things in life, not all no-cost loans are the same.  Some institutions believe no-cost means no lender fees, others include bank fees plus bank controlled fees like credit reports and appraisals, and still others include bank fees and all other fees from any third party.  On a loan amount of $300,000.00 there is typically around $3000 in closing costs, approximately 1/3 from the lender and the rest from title, escrow, appraisals, credit agencies, and other fingers in the pie.  Needless to say it is important to be specific with you lender as to what fees are and what are not being covered.

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How do banks offer no-cost refinance?  No-cost is not really no-cost.  Typically the interest rate is higher than a no-points loan.  A higher interest rate means a higher monthly payment all else being equal.  Is the difference .125% or .875% in rate?

 

However all else is not equal.  Is the borrower taking the $3000 out of his checking account to pay the closing costs?  Is the borrower adding the amount to the loan (most typical) and then amortizing the amount over the life of the loan?  Is there consideration on the impact of a higher interest rate in income tax planning, although minor?  Is there consideration on a better use of that $3000 from her checking account that may have a better monetary return?

 

These questions do not all have the same answers and working with a mortgage professional that presents you with all the pros and cons is important.

 

The market environment is another consideration.  Predicting interest rate direction is extremely difficult.  I remember a popular economist tell me that predictions are made based on present facts and figures.  As time passes and numbers change, so do their predictions.  What that really means is that economist do the best they can with the information given.

 

In downward moving interest markets, I am a bigger proponent of no-cost refinances.  Why pay to get to the lowest rate, a rate that your friend told you about when you can get their quickly overtime taking advantage of as many no-cost refinances as possible, keeping your cash-in-hand.

 

In upward moving interest markets, like the market we are currently in, I am less enthusiastic about no-cost refinancing.  If the seven-year cycle holds true (thanks Dr. Bekkar), recouping costs and taking advantage of the lowest possible rate may be the best choice?

 

In all markets, the individual analysis I wrote about above is always necessary to allow our borrowers the ability to make informed decisions.

 

What do you think?

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