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?

IMPORTANT: 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
What’s the catch?

Whenever you do a true No Cost Refinance the interest rate on your new loan will be around 0.125% – 0.25% (0.125% APR to 0.25% APR) higher than a refinance transaction you paid fees on.  Over time the No Cost Refinance will definitely pay off if ALL the conditions discussed in the main post are present. That may or may not be the case if you pay some fees to refinance. As always I’m happy to do the calculations for you. Simply send me a text or call and I’ll email you the analysis very quickly.


Will this work with a cash out refinance?

No, because one of the necessary components to guarantee you’ll save money and shave years off your mortgage is that your new loan amount must be the same as your current mortgage’s outstanding balance. On a cash-out refinance of course that is not the case.

How do I calculate how much money I’ll save and how many years I’ll shave off the life of my mortgage?

Text or call me any time and I’ll share the calculation with you, or do the math for you and send the analysis to you via email.

In terms of how much extra per month to guarantee you’ll save money over time and shave months or years off your mortgage – that’s easy. All you do is deduct your new payment from the payment on the loan you refinanced from and include that as an extra principal payment on your new mortgage each month.

Of course, all the criteria discussed in the main post on this topic need to be in place for this to work correctly.

Are there any other benefits to a No Cost Refinance

I think it’s worth repeating the amount of FLEXIBILITY you can enjoy with a No Cost Refinance.  If all goes to plan and your scenario meets all the conditions you could save a lot of money and shave years off your mortgage by doing a No Cost Refinance and making the SAME payment as you are making now. However, if “life happens” and you need to reduce your monthly expenses, due to perhaps a work layoff or family illness, you always have the OPTION to make the new, lower payment. This could save your house.

Of course, if you make the new, lower, payment you won’t save as much money or shave off as much time but at least you would have more chance of staying afloat while your household income is temporarily, or permanently limited.

If you think of it it’s like borrowing money at a very low interest rate. As far as I know the lowest interest rates in the USA are always on mortgages secured by real estate.

Does only a NO COST Refinance make sense?

It depends. If you currently have a fixed mortgage and you refinance to another fixed mortgage with a lower rate you can make the calculations, or I can help you with that.

Let’s say hypothetically you could have saved $50,000 and shaved 6 years off your mortgage by doing a No Cost Refinance and continuing to make the same payment on your new mortgage if you had good credit. But because your credit isn’t good you can only qualify for a “regular” mortgage with say $3,000 for fees folded into your new mortgage. Well, if you think about it, because of the fees you “only” saved $47,000 and you “only” shaved off say 5-1/2 years off your mortgage it’s still a pretty good deal, isn’t it?

If you do go down that path just realize that there is a payback time whereas there is no payback time on a No Cost Refinance.  This could be an issue if you intend to sell before you recoup the fees. None of these numbers are subjective because we are talking hard numbers, and everything can be calculated down to the penny. Let me know if you need help.

Does this work with a current or potential new ARM?

If you are going from a fixed mortgage to another fixed (normally a 30 year fixed to 30 year fixed) then, with my help if needed, you can calculate (down to the penny and to the month) how much time and money you will save.

I say “will” save because you will ALWAYS save both time and money as long as you meet all the conditions discussed in the main No Cost Refinance page.

If you are going FROM or TO an ARM mortgage then unfortunately no definite numbers can be calculated because we don’t know what interest rate adjustments your current ARM would have experienced had you kept it, and also we have no way of knowing what new adjustments your ARM may experience in the future.

Whether you’ll feel more comfortable reducing your risk by moving from an ARM into a FIXED mortgage is a different conversation. Call me if you’d like to discuss.

Does everyone qualify?

Just like any refinance the borrower needs to qualify meaning their income, assets and credit history are evaluated. The subject property also needs to be evaluated and the transaction needs to meet loan-to-value ratio (LTV) guidelines.  Some borrowers can qualify for a stated income mortgage or one in which bank statements can be substituted for conventional proof of income.  Applicants with higher DTI’s, lower credit scores and higher LTV’s or a combination of these factors don’t qualify for a No Cost Refinance but qualify for a low cost or a regular cost refinance. Every scenario is different. If your property is in California please reach out to me to discuss your unique scenario.