Special offer

"No cost" refinance loan is not really a no cost. You just dont pay the costs, so the effect is the same.

By
Education & Training with Modus Mortgage NMLS #116235

There is a lot of confusion about the "no cost" refinance. What people need to realize is that there are always costs on a loan such as appraisal, underwriting, processing, title, escrow, and etc,. The difference is that with a "no cost" loan the rate is increased by a certain amount of basis points, depending on the loan amount, to create a credit from the lender to the borrower to cover these costs. This way the borrower does not pay the lender costs, but will pay for them in the rate.

This is great for a borrower that plans to keep the loan for less than 6-7 years. If the borrowwer plans to keep the loan longer than this period, they could be costing themselves over the long term because they will pay more interest from the higher rate.

This is careful to consider when trying to get the lender to pay the closing costs. If you are planning on keeping the loan for more than the above mentioned term, the better option is to lock the lower rate, pay the closing costs, but roll them in to the loan. This way you do not pay them out of pocket and this works out to more savings over the long term.

Comments (3)

Daniel H. Fisher
www.FisherHermanRealty.com (704) 617-3544 - Charlotte, NC
MCRP - Charlotte Real Estate, NC or SC

Simple straightforward explaination. With a "no cost" loan the rate is increased by a certain amount of basis points, depending on the loan amount, to create a credit from the lender to the borrower to cover these costs. This way the borrower does not pay the lender costs, but will pay for them in the rate. For borrowers who need all the help they can get with closing costs, it can make sense to roll fees into the rate.

Aug 15, 2011 04:43 PM
Julie Booth
Fidelity National Title - Federal Way, WA
Keeping the parties informed of the escrow process

Hi Jason, as an escrow officer I have seen much confusion over this in the past.  With the new rules and regulations, people are informed as to the costs associated with the loan - the GFE makes it very clear so I imagine that you have this conversation with them very early in the process and so it is not a shock at the signing table.

Aug 31, 2011 05:49 AM
Jason Schweiger
Modus Mortgage - Auburn, WA
Loan Originator: Modus Mortgage

Hi Julie,

I agree with you completely and I always go over this in full detail. It should be called "borrower pays no costs" rather than a "no cost" loan, even though the result id the same. Borrowers should know there are always costs for a loan, but they do not pay them with this slightly higher rate option.

Aug 31, 2011 05:57 AM