It is not uncommon to hear some advertisements claim that you can refinance your mortgage with no closing costs. There is truth in this, but it is not necessarily the whole truth. In this article, we will talk about the big picture of closing costs, loan amounts, and interest rates so you understand what options you may have and the consequences that come with them.
First, let’s put a couple of hard truths down on the table: there are always closing costs and one way or another you are going to pay them. Believe it or not, the lender actually has very little to do with most of the closing costs associated with any mortgage transaction. That’s because most of the costs are third-party fees paid to others who provide services required to close the deal, like the appraiser, the settlement company, the title insurance provider, and so on. Sure, most lenders have fees as well, but our fees are usually only a small piece of the total.
So, if these fees are not controlled by us, how can we provide a no closing cost refinance? The closing costs get paid from one or both of two other sources. One of those sources is loan proceeds. There are rules on what can be “rolled in” to a loan that is not classified as a cash-out refinance, which typically come with higher rates and harder qualifying requirements. In some cases, though, most or even all the costs can be paid by increasing your loan amount to cover them. In these cases, you will be paying for them over the life of your loan, but the slightly higher loan amount typically increases the monthly mortgage payment by a small amount.
The other way to pay closing costs is in the interest rate. Just like you can pay points to lower the interest rate, the rate can also be increased to, in effect, pay points back to you to cover the costs. This is often referred to as premium pricing. The resulting credit can be used to pay the costs associated with the loan. Just as above, you still end up paying the closing costs but you do so by making a slightly higher monthly mortgage payment instead of a lump sum payment at closing. The proportion between how much credit you get in trade for how much interest rate is variable and can definitely impact the decision-making process.
As with most other mortgage decisions, it is a good idea to think about the long-term consequences of your decisions. For example, premium pricing is a great strategy in a falling interest rate environment. We never know when rates have reached their floor and trying to play the guessing game could mean missing the opportunity to save thousands of dollars over the life of the loan. Premium pricing allows you to refinance repeatedly, taking advantage of slightly lower rates as they become available, without having to pay the closing costs on multiple transactions out of pocket. Then, when you believe rates have dropped as far as they are likely to go, paying the closing costs out of pocket to get the lowest possible rate makes sense.
If you are considering a refinance, I can help you put together the information and numbers you need to make informed decisions. Whether you are trying to reduce your interest rate or the term of your loan, or trying to cash out some of your equity, I can help you achieve your financial goals.