November 2019

A No-Cost Mortgage When Refinancing?

A No-Cost Mortgage When Refinancing?

When Refinancing, it’s important to consider your options when it comes to mortgage closing costs. Let us help you understand closing costs and how a no-cost mortgage may, or may not, benefit you.

So what is a No-Cost Mortgage?

This is when the borrower is able to use enough Lender Credits to cover some of the closing costs (usually the Lender’s fees); However, as a borrower, you may be expected to cover other out-of-pocket expenses at the closing. These fees & costs can include: title insurance, a title search, appraisal, credit check, and other charges; And sometimes, the amount of these costs can add up to be between 2-5% of the mortgage amount. However, it is possible to negotiate these expenses as the Lender may be willing to cover some of these additional mortgage costs as well.

Other Ways to Obtain a No-Cost Mortgage:

  1. Lender Credits

The argument of Points vs. Lender Credits are made time & time again in regards to obtaining any mortgage. (As a friendly reminder, a Point is 1% of the total mortgage amount and, for each point you’re willing to pay upfront at the closing, it’ll lower your monthly interest payment. Lender Credits operate in the opposite manner, meaning (for each credit) you can lower your out-of-pocket closing costs in exchange for a higher monthly interest payment.)

  1. Negotiate the Yield Spread Premium (YSP)

Mortgage brokers inherit a yield spread premium (YSP) as payment to work on your loan. The end lender pays this fee to the mortgage broker for delivering your mortgage loan. YSP is the mortgage broker’s profit. Knowing this, you can request that the broker utilize the YSP to shape your no-cost home loan.

For example, a mortgage broker gets paid a one percent YSP by the lender need not charge the borrower an origination fee. In this case, the YSP can save you one percent of your loan amount in out-of-pocket costs. (And a broker getting two percent YSP can cover even more of your closing costs.)

  1. No-Cash Refinance Loans

It’s possible to refinance having fees already bundled into the mortgage. These mortgages are considered “rate and term” refinance, which come with lower rates than cash-out refinances. The upside to wrapping closing costs into the new loan is that you get a lower interest rate than if you were to raise your rate to pay for costs. The downside is that you lose home equity when you include closing costs in your refinance loan. In addition, because the costs are being financed, you’ll pay interest on them.

Does a No-Cost Mortgage make sense?

According to certain statistics, it’s been shown that it doesn’t necessarily pay-off to utilize Points at closing. The numbers suggest that, for most borrowers in the last 25 years, paying points has been a bad decision. Research using data from 1990-2015 found that on average, borrowers have kept their mortgages only five years (Agarwal, Ben-David, and Yao (2016), Journal of Financial Economics). Historical data from Freddie Mac is consistent, showing the majority of borrowers have refinanced, sold, or otherwise closed their mortgage within six years.

What does this mean? That more mortgage borrowers didn’t stay in their homes long enough to reap the benefits of saving on lower interest rates by paying a substantial amount out-of-pocket at closing; Long story short, borrowers lost money by paying upfront at closing versus saving money over time.

Is there a time where a borrower should pay Points?

Yes! See below:

  1. You won’t be moving or refinancing for a long time.
  2. Future events may not able you to qualify for a similar mortgage.
  3. Your tax rate this year is much higher than what you expect in future years. (You want to deduct as much as possible when your tax rate is high, and points are deductible against income in the year you get the mortgage.)

Wanna learn more? Visit us here to see how Refinancing can benefit you!

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