Financing in 94536>Question Details

norm, Home Owner in 94536

"no fees, no points" - does that mean I'll have no out of pocket costs for the refinance, or are there other costs that are not included?

Asked by norm, 94536 Fri Apr 5, 2013

this is for a refinance we are considering since our 30 yr fixed is @ 4.5%

I assume a lender would be charging me a slightly higher rate to cover the costs associated with the refinance than what they can get it for, and that is how they can offer "no fee/points"?

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Norm,

You are accurate in that a lender will charge a higher rate for a no point/no fee loan - this is indeed how they cover your costs.

What is important here is how much costs they are covering vs the savings or "cost" of the loan in rate.

Let's look a little closer to see what I mean:

A typical refinance will run about $3k in closing costs all things considered. So, on a $300k loan the lender will need to not only cover there costs, but pay themselves as well. In your case, at a 4.5% interest rate, that payment would equate to $1520 per month.

A loan at today's rate of say 3.625% with no points -- but you pay that $3000 in closing costs, would have a payment of $1368.

So the savings if you just go no point is about $150 per month. That means if you paid your closing costs (whether they were included in the loan or you paid cash), it would take you aobut 20 months to recoup that cost - which is extremely good and in which case you should be advised to go pay the fees and go with the lower rate - if you are staying in the home for longer than 20 months.
($3000/$150=20).

For most of my clients that are refinancing - especially now with rates this low, I am happy with a payback of 36-60 months if they are keeping the home long term. Most people, even with the best of intentions, do something with a loan on their home (sale, refinance, etc.) every 5-6 years.

I hope that this covers everything, but should you have further questions, please don't hesitate to ask.
1 vote Thank Flag Link Fri Apr 5, 2013
Lender is charging a higher interest rate to cover your fees. Every loan transaction involves closing costs such as Title and escrow charges, Pre-paid interest and miscellaneous costs. These costs can be either paid by you at closing or incorporated in the loan term such through a slightly higher interest rate.
0 votes Thank Flag Link Tue Nov 26, 2013
“No Closing Costs” Option applies to refinance transactions and covers the cost of the appraisal fee, credit report fee, flood certification fee, tax service fee, notary/signing fees, title fees, escrow/closing fees and recording fees. The borrower is responsible for paying prepaid interest, property taxes, state mortgage taxes, insurance, mortgage insurance and existing lender payoff fees.
0 votes Thank Flag Link Tue May 7, 2013
"No fees, no points" may be different than a "no cost" refinance. There are other costs outside of "fees and points" to a refinance such as escrow & title fees, pre-paid interest, property tax impounds if you are getting them, annual insurance policy, etc.... With a "no cost" refi the lender pays ALL your closing costs, so you literally do the refinance with no cost to you. Many times a lender will have to go with a slightly higher rate to use the yield spread premium to pay your costs. But rates are so low now, sometimes you can get the lowest rate and all or most of your closing costs paid. If you are at 4.5% now, you should be able to get a very good deal.
0 votes Thank Flag Link Fri Apr 5, 2013
A quick side note to John's comment:

One exercise you should consider doing is a breakeven analysis between your financing options (to pay or not pay points for a lower rate). To calculate "breakeven date”:

1) Calculate the monthly payment WITHOUT paying down your rate,
2) Calculate the monthly payment WITH paying down your rate,
3) Take result from #1 and minus result from #2 (this is your savings per month by paying down your rate).
4) Now, take the total cost of paying down your rate and divide by the result from #3 (this is your breakeven point in months-time).

Now you can consider the cost vs. benefit based on the number of months/years you intend to own the home. For every month you stay past the breakeven point you are saving money. Leave before the breakeven point, and you have lost money by paying down your rate.

-Steve
0 votes Thank Flag Link Fri Apr 5, 2013
Also....besides shopping around for lenders, shop around for the plan.

Some rates may be lower -- but the loan origination points are charged up front
Some rates may be higher -- but the loan origination points are not applicable

Either way, it's a matter of you either pay now or later....

Get the GFE (Good Faith Estimate) to see what fees if any are charged. Don't make the assumption that there won't be any costs --- get it in writing.
0 votes Thank Flag Link Fri Apr 5, 2013
The lender is going to get its costs one way or another. They all just package the costs differently. I would shop carefully and get each lender to provide a "good faith estimate of costs." Depending upon how long you plan n staying in your home, it could be advantageous to pay the fees and have a lower interest rate.

Best of luck. Remember that if a deal sounds too good to be true, there's something they are not telling you.
0 votes Thank Flag Link Fri Apr 5, 2013
Hi Norm,

You assumption is correct. Here are a few links you might find interesting:

"Retail Banks vs. Mortgage Broker/Bankers"
http://tinyurl.com/6qln6nd
Personally, I only work with Mortgage Broker/Bankers.

http://docs.Steven-Anthony.com/SAR-HowMortgageRatesAreDeterm…
http://docs.Steven-Anthony.com/RateShopping-DoItRight.pdf

-Steve
0 votes Thank Flag Link Fri Apr 5, 2013
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