No cost loans. How do they work?

When you refinance through a direct lender or mortgage broker there are various third parties involved who charge fees: title company, county recorder’s office and appraiser etc. On a hypothetical $400K loan they may total up to around $3,000.

When you apply for a NO COST refinance those entities don’t suddenly become charities and work for free! HOWEVER because your broker has access to a variety of interest rates for your unique situation they can find an interest rate for you that comes with a lender CREDIT. This credit can then be used towards your closing costs.  In this hypothetical example, if your lender CREDIT is $3,000 then whichever way you slice it this is a true no-cost refinance.

Let’s use a refinance example: your current loan payoff is $400,000. As part of the process you pay $600 out of your own pocket for an appraisal. And when you get to the closing table your settlement statement shows you were charged an additional $2,400 for title fees etc. So at that point you have incurred fees of $2,400 and paid $600 for an appraisal on credit card for a total $3,000.

Now at this point you might ask “what happened to no-cost?”. So here’s the good the CREDIT column of your estimated settlement statement if there’s a CREDIT to you of $3,000 then your total cost to do the refinance is $0! Correct?

Here’s the hypothetical numbers for a refinance:

$ -400,000….Loan payoff to current lender

$ +400,000….NEW loan amount

$         -600….appraisal (paid outside escrow on a credit card)

$      -2,400….title and other third party fees billed at close of escrow

$     +3,000….lender CREDIT – credited at close of escrow

Make sense?

1) NO COST rates are approximately 0.25% higher than ones where you would incur the above fees and get ZERO lender credit

2) You cannot compare any rate (or rate quote) your friend got to your rate or quote because rates change daily and everyone’s scenario is different (different loan amount, loan-to-value ratio, credit score, zip code, residence type, occupancy type, combined-loan-to-value ratio, debt-to-income ratio etc) . Perhaps the biggest variable of all is whether your friend got a lender credit and if so, how much?

3) At the time of writing (July, 2020) approximately 90% of all refinance approvals come with an appraisal waiver meaning no appraisal cost needs to be factored in and no-one needs to visit your house to do an appraisal