No Closing Cost Refinance Loans

No Closing Cost Refinance Mortgage Loan – No Points, No Fees

The majority of new refinances are now using a system where the lender absorbs all of the initial Non-Recurring Closing Costs of the loan, also known as a No Points No Fees Refinance (NPNF Refi). For individuals to qualify for a no closing cost refinance loan, the borrower will take a slightly higher rate than your typical No Points home mortgage, roughly .250% or .500% higher.

The fees that make up all Non-Recurring Closing Costs are as follows: Appraisal Fee, Credit Report, Lenders Fee, Broker Fees, Title Insurance, Escrow Fees and Recording Fees. The remaining fees of a mortgage; Property Taxes, Interest, and Insurance; are not considered Non-Recurring Closing Costs.

Should I Get A No Closing Cost Refinance

How do you know if a no cost loan is right for you? It depends on the amount of time you plan on staying in your house. Also, if you’re short on money, No Closing Cost Loans are a great way to take advantage of lower rates. If you are planning on staying in your home for less than five years, taking advantage of a No Cost Loan would be your best bet. To calculate your break-even point when comparing loans, take the payments of both the conventional mortgage and No Closing Cost home loan and take the difference between the two monthly payments and divide that into the amount of the non-recurring closing costs that would be present in a conventional mortgage. This will tell you how many months it would require to gain back the expenses of the closing cost, and then you can compare this to the length you plan on staying in your home.

A Comparison of No Cost vs. Conventional Mortgage

You qualify for two different loans for an amount of $300,000; one conventional, the other No Closing Cost. The conventional has non-recurring closing costs of roughly $2,800, a rate of 6.00%, and a monthly payment of $1,799, while the No Cost loan has a rate of 6.25% and a monthly payment of $1,847. The difference between these two monthly payments is $48. To identify the pay-off point, you would take the $48 and divide that into the non-recurring closing costs of $2,800, giving you a 58.4 month (just shy of 5 years) time frame for a No Closing Cost mortgage. So as long as you sell the house prior to this point or refinance, you’ll have saved money with a No Cost Loan.

Now if we add a third option, another $300,000 loan for 5.75% at 1 point plus base closing costs of $2,800. This brings the total upfront costs to $5,800 with a monthly payment of $1,751. The difference in this payment would be $96 per month, and that divided into $5,800 would give a pay-off point of 60.4 months (barely over 5 years). Again, as long as the house is sold or you refinance the home again prior to five years, you save money.

The History and Analysis of No Closing Cost Loans

No Cost home loans have been present in the mortgage industry for many years, starting back in the early 90’s. We hear more and more about these types of loans, so one would think this is a recent addition to mortgage programs. They became more and more popular with the booming housing market once property values kept escalating. Many of today’s lenders will only do No Closing Cost loans for amounts in excess of $250,000. With consumer scrutiny increasing towards the lending practices of brokers and banks; due to shady mortgage transactions in the past; many consumers are taking a ‘Caveat Emptor’-stance towards deals that sound too good to be true. However, when consumers are acquainted with No Cost loans and comprehend the system of payments, they are very logical and transparent options for home owners.

The Costs of a Loan – What Are They?

No Cost mortgages can also be referred to as no point loans, no fee loans, or a no closing cost refinance. The different features of a loan are much more easily comprehensible once you learn a little bit of vocabulary of the mortgage industry. All loans have costs that differentiate themselves from each other and make each loan program more applicable for individual borrowers, and all costs are part of one of the following categories:

Points – These are pre-payments to help reduce your interest rate on a loan. They are sometimes referred to as discounts or origination fees. Discount fees are for the lender who funds the loan and origination fees are towards the broker or lender that processes the loan. A point refers to 1% of the loan amount, a point on a $300,000 loan would be $3,000, 2 points would be $6,000, etc.

Non-recurring Closing Costs (NRCCs) – these costs include the appraisal fees, credit report, title fees, escrow fees, notary fees, recording fees, and lender-specific fees (document preparation fees, underwriting fees, administration fees, processing fees, etc.) Points can also fall into this category as well. These are the fees that are absorbed in a No Closing Cost mortgage and are applicable for obtaining a loan. If points are not included, these are sometimes referred to as the borrower’s base closing costs.

Recurring Closing Costs – The big three: mortgage interest, property taxes, and mortgage insurance. These are fees that are paid with any mortgage in one way or another. You can sometimes avoid mortgage insurance by putting a large enough down payment on the home, usually 20% or more. It is recommended to pay these out of pocket rather than finance them with the loan as you can be paying huge interest with these costs.
Different Ways for Costs to Be Paid

Costs can be paid by the seller, lender, and borrower; depending on the loan scenario; here are some ways they can be paid:

Borrower (you) – The costs can be included into the loan amount (refinance only), or can be paid out of pocket by yourself via check to the escrow or title company at the time of closing. You can also choose to have the lender pay them at the cost of a higher interest rate.
Seller – When selling a home, a seller might pony up the NRCC (non-recurring closing cost) credit to help the buyer’s closing costs. The seller would normally pay just for the NRCC, not the recurring closing costs.
Lender – Lenders can utilize a yield spread premium (YSP), which increases the borrower’s interest rate to pay for their NRCCs (non-recurring closing costs). For example, a loan amount of $300,000 has NRCCs of roughly $2,800. The lender will increase the rate to receive an additional point and would translate to a .25% increase to the borrower’s mortgage rate. One point equaling $3,000, which covers the $2,800 and the extra $200 is usually kept by lender as additional profit.

Still Doesn’t Make Sense?

A No Closing Cost Loan is not the same as a no out-of-pocket costs loan where the closing costs are included into the total loan amount. Also, a no lender fee loan is simply a loan where the lender doesn’t apply their own lender-specific costs that were explained above. The easiest way to determine whether your loan is a true No Cost loan is to verify that the current outstanding loan balance on your existing loan to be paid off is equal to or slightly less than the new loan amount. And make sure that the only fees you are paying out of pocket are recurring costs of interest, taxes, and insurance due.

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