The Truth about the "No Cost Mortgage"

Today every major lender can provide a no-cost refinance.  But is there really a cost to the customer?  You bet.  It comes in the form of a higher interest rate. To offer a "No-Cost" refinance, the lender must charge a higher-than-market interest rate (giving the lender a premium) in order to pay for all of the third-party fees such as escrow and title, appraisal (when needed), and lender fees such as flood certificate, tax service fees, etc.  So while the customer does not pay any closing costs at all and there is nothing added to their loan balance, it certainly isn't free.  Typically the interest rate will be at least one-half of 1 percent higher than the going "no points" rate.  So if you do the math, if you plan on getting rid of the loan in a couple of years either by refinancing, again, paying off the loan or selling the home, a no-cost refinance does not make sense for most customers.  As smart loan officer will simply run the math and the customer can make an informed decision.