Are There Really No-Cost Refinance Loans?

No, it’s a myth.

I hear people tell me all the time how they were offered a “no-cost refinance” through their current lender, so they took it without questioning because, hey, after all, it’s no cost. I mean no one else can do that, right?

Ever heard the saying, “If it sounds too good to be true…”?

First, let’s understand what a “no-cost refinance” is or can be construed as. There are two common perceptions of the “no-cost refinance.”

1 – Borrowers did not have to pay any money at closing, so in their minds they received a “no-cost refinance.” In actuality, closing costs are real and exist. Even if there are zero lending costs, there are still title costs, recording charges and government taxes on the transaction. I can assure you that the government is not saying, “Hey guys don’t worry about the taxes, this one is on us.” So what occurs is that these costs are added to the loan balance. In other words, you go into more debt. There is nothing wrong with this in itself, as many times it makes financial sense, but consumers can mistakenly assume they are refinancing with “no costs,” when they are increasing their loan balance and, therefore, do have “costs.”

2 – As stated above, there are hard costs in lending. Costs that cannot be waived, and they definitely exist just like the government tax portions of the transaction. So is it possible to refinance let’s say a $100,000 loan, bring $0 to closing, and start out with a new loan of only $100,000 (nothing added to loan balance, and also nothing paid at closing)? The answer is yes. This is possible. But how?

When the above occurs, no one is waiving costs, but rather they are being paid for by the lender. This is where people make bad assumptions. The lender is not covering your costs because they like you a lot. They are covering these inherent costs (making it a true “no-cost loan” to you) because you are receiving a higher interest rate than you could have otherwise received if you were to pay for incurred costs. The money received by way of a higher-than-market rate is what is used either to pay for or cover the cost (that do exist) of your closing transaction.

Is option No. 1 or 2 bad or wrong? No, but the mortgage consultant needs to understand your situation to be able to advise properly what is truly in your best interest. Some major lenders do not consider your interest, but rather what you are most likely to say “yes” to when providing options. Sometimes honesty and ethics don’t get you more business, but it IS the right thing to do.

So, in summary, most mortgage companies (including The Florida Mortgage Firm) have the capacity to offer a “no-cost refinance” (either thru option 1 or 2 above). The difference between us and an existing lender would not be costs (with option 2), but rather your rate (lower). Far too often consumers stop the thought process at the words “no costs” and do not realize they can be offered the same “no-cost refinance” with another lender (exact same loan), but at a lower rate.

I hope this helps, and please feel free to share, as consumers (friends, family members, coworkers, maybe even you) could be on the verge of making a decision that could result in them overpaying for a mortgage loan for years to come.

As always, feel free to reach out if you have any questions or are in need of a purchase or refinance mortgage loan. I sleep well at night, and only provide honest and transparent advice. Our wholesale-lending rates beat our national competitors on a regular basis, too, so we let the numbers to do the talking and never take the “salesy” approach. The math sells itself.

Stay Tuned for more informative articles to come.