I’ve posted about our recent refinance. Whenever we get a mortgage or do a refi on an existing one, we choose a no cost option where all our associated costs are covered (appraisal, origination charge, recording fees, title insurance, credit report). The rate is slightly higher than for a loan where you pay the costs, but it usually takes up to eight years before you’d be better off with the slightly lower rate. That’s too long for me.
Plus, any time we’ve done a no cost refi, we’ve ended up with some money in our pocket. The reason is that, in order to get the opportunity to make you a loan, the lender credits you, the borrower, with an amount based on the specific loan (ie. amount and interest rate) you’re getting. The more they want to make the loan, the higher the credit.
It’s complicated and a little hard for me to explain, so I asked for some help from our broker. I asked the following:
I want to emphasize in my blog post a) that you can actually “make” some money in the process of doing a no-cost refi; and b) that it’s important to have enough cash on hand in order to be able to close. We had to write a check for more than $5K in order to close, all of which was refunded (and more). BUT we had to be able to write that check in the first place. We wouldn’t have been able to do the refi otherwise – unless maybe they would have let us roll it into the loan? Would that have been an option?
This is what they said:
You are correct in saying that sometimes you actually get back more than what you had to bring to closing. The goal on a no-cost refi is to break even (as far as the escrow refund that will come back) but sometimes in pricing a loan out, the credit from the lender exceeds these costs and the borrower ends up benefiting from that. A basic mathematical way to look at that is if you have a lender credit of $4,000 to go towards closing costs (closing costs are the appraisal, credit report, flood cert and title fees) and say those fees only total $3,000 so you have an extra $1,000 that then gets applied to the prepaid items (prepaids are the new escrow accounts (for property taxes and hazard insurance) and interest charges). If the amount collected to set up the new escrows is $1,500 and you have a credit of $1,000 being applied to that, then you only bring $500 to closing even though the refund from the old lender is still going to be closer to the $1,500.
What can increase the amount needed to close is the payoff of the old mortgage, we always have to estimate that and the new loan amount is based off of the estimated payoff at the time of application and, while those two numbers will be close, they are never exactly the same so then the borrower would bring that difference to closing (as to not increase the loan amount).
Closing costs can be rolled into a loan but we don’t see that very much right now because of the low rates and high lender credits. Borrowers are able to do a refinance without increasing their loan amount. Your a) and b) points are right on the money. If a borrower chose to roll the costs into the loan, those costs are usually just the prepaid items that they will be getting refunded and then they are amortizing their taxes and insurance payments over 30 years, so financially that is not the best option.
In our case, the credit was for $11,753.53 and, after all was said and done, we pocketed more than $2,500 – since we just received the escrow refund from the previous loan. So, in our case, we basically got paid to refinance our mortgage at a lower rate. AND, we ended up getting a 3.5% rate, despite thinking it was going to be 3.625%. It’s unlikely rates will be lower than this in the foreseeable future (if ever), so I doubt we’ll be refinancing again. So glad we got it done when we did. It definitely required a LOT of perseverance.
But it was a win-win all around!