Forgotten Your Password?

Need to Register?

Corey Barcus

A No Closing Cost Refinance - What's the Catch?

Monday, September 26, 2011 - Article by: Corey Barcus - CBC National Bank - Message

They're not as prevalent as in 2006, but there are still no closing cost refinance options out
there for you if you'd like to refi your home mortgage. You hear ads on the radio and see
them on TV all the time. They can be a good deal, but like so many other things in life
you've got to do your homework before you get a no closing cost refinance or any other
type of refinance. For that matter, it would behoove you to do your due diligence before
you get any type of loan or make any large financial transaction. There can be many pitfalls
and you owe it to yourself and your financial future to avoid them.

As your mom once told you, there's no free lunch, and so it is when you're trying to
refinance your mortgage. There are a couple of things to be aware of if you're searching
for a mortgage, weather it's of the no closing cost variety or any other.

The Most Important things to Check When Getting a No Closing Cost Refinance -

1.Refinance Interest Rate - The interest rate alone, more than anything else, will
determine how much you'll pay for a particular mortgage if the term and dollar amounts
are equal. Look at the APR, which can give you a decent way to compare different
mortgages. The APR, which stands for Annual Percentage Rate, factors in additional fees
and other charges, and was mandated by the Federal Government to allow consumers to
more easily compare mortgage products. There is no complete standardization here so it
may not be a complete apples to apples comparison, but it will be fairly close. You must
still dig deeper, however.

2.Fee Structure - There may not be any closing costs, but the lender could still roll in
some fees they may classify in other ways. You're required by Federal law (the Real Estate
Settlement Procedures Act (RESPA) of 1974 ) to be given a good faith estimate within 3
days of applying for a loan, but nothing says that all the closing costs must be included in
the estimate, so be careful. You need to demand a schedule of the complete fee structure
when getting an estimate from any prospective lender, even those promising a no closing
cost refinance.

3.Where did the fees go? - Are there really no closing costs and fees, or are they simply
rolled into the refinance, so you don't pay for them out of your pocket, but you end up
financing them for the term of your new mortgage, a much more expensive proposition in
the long term. If you hear the popular advertising catch phrase "no out of pocket
expenses" it's a good bet that's what the lender has in mind.

In many cases there may be no closing costs, but as you were told there's no free lunch,
and probably no steak dinner either, despite what the lender promised you in the ad. All the
lender has to do is raise the interest rate ever so slightly and they'll more than make up for
the lack of fees over the term of the loan. They'll profit from the loan weather they keep it
in house, or do what's known as "selling the paper", and selling the loan to another lender
for servicing. This is common practice in the mortgage industry, although lenders are
being much more careful about the loans they'll purchase now than they were in 2005 -

To see how a small change in the interest can benefit the lender over the long term here is
an example:

Say you have a $250,000, 30 year fixed mortgage refinance at 5.8%. With such a refi,
you'll have monthly payments of about $1,467 and pay approximately $278,077 in interest
over the life of the loan. If closing costs of $3,500 are eliminated, but the lender raises the
mortgage interest rate only 2 tenths of a point to 6%, watch what happens:
Your monthly payment rises to $1,499 and you pay $289,595 in interest over the life of the
loan. So you saved $3,500 on the front end of the loan, but it cost you over $11,000 on the
back end. That's why you absolutely have to compare a no closing cost mortgage with a
mortgage that the lender includes fair and normal closing costs. It's a better practice on
many occasions to examine a traditional mortgage and negotiate to have many of the
closing costs dropped or reduced after you see the good faith estimate. You may come out
better than if you use the no closing cost refi from another (or the same) lender.

Finally make sure any prospective (and always remember that's all they are, a prospective
lender, until you actually sign the loan papers. You can be assured they remember, so you
should too.) lender gives you your HUD-1 settlement statement at least one day prior to
the loan's closing. That will be a complete accounting of the entire fee structure. Check
every single detail against the good faith estimate you were given earlier to see if there are
any large discrepancies. A few, small differences are normal, but if you're seeing $1,000
fees that mysteriously appear out of nowhere, tell the lender you're walkin' unless they take
them away.

One other thing you should always check when you're looking at getting a mortgage
refinance or any other loan - your credit score. There are two main reasons to check your
credit score before you try to refinance.
One is that you need it to determine weather or not you're getting a fair interest rate. The
second is that your FICO score will largely determine the interest rate you're offered on
your mortgage.

Related Searches:

Didn't find the answer you wanted? Ask one of your own.

Get an answer
Subscribe to our news feed.