"No Cost" Refinance
"No Cost" refinance has not been clearly explained by mortgage bankers and I want to accurately describe the no cost refinance process. For most of my clients, a common goal in a refinance transaction a lower your monthly payment without having to pay a lot of cash "out of pocket". To meet this need, we have developed two "No Cost" Refinance Programs. As always, please feel free to email me with any questions about a no cost refinance
1) Use the "yield spread premium". Under this no cost refinance program, we will pay all of the closing costs associated with your loan for you. You incur no cost in the refinance transaction. We use the "yield spread premium" from slightly higher than market interest rates to pay these costs for you. We can pay both your closing costs (the true cost of the transaction) and prepaid items (escrow items for taxes and insurance), many of our clients using the no cost refinance program decide to have us pay only your closing costs. This is because your current lender has an escrow account with approximately the same amount we will require to establish a new escrow. Your current lender will refund their escrow account usually 30 days after closing. If you want to settle with no cash, we can pay both your closing cost and escrow, you will get a refund in about 30 days effectively taking some cash out of the property but your interest rate will be higher.
Depending on your loan amount, a "No Cost" refinance is typically .375% higher than our zero point, no origination fee quote. The beauty of the program is that you can lower your payment at any time the no cost refinance rate is lower than your current rate. The old "rule of thumb" was that you had to lower your rate by 2 percentage points for refinancing to make sense. Using the "no cost" approach, I frequently have clients lower their rate and payment when the "no cost" rate is only .500% lower than their current rate. There will never be a prepayment penalty so you can lower your payment at any time it makes sense.
2) Roll in your costs. Under this program, assuming you have equity in the property, we can add your closing costs and/or escrow amounts to your loan balance. The advantage is that you will pay market rates (we do not have to increase the rate to get a yield spread premium as above). All the comments about closing cost/escrow amounts above apply. Rolling in your costs can be a better option for a "no cost refinance" if you have the equity and expect to remain in the home for more than 5 years. Consider this, if you have a $100,000 mortgage balance, and the market is at 6% without points, we may have to increase the rate to 6.250% to get enough "yield spread premium" to pay your costs, but if your costs are only $1,000, added to your balance will only be a negligible increase in your payment. As always, tell us what you are trying to do and let us give you some options.
Calculate your "No Cost Refinance Payback Period" to verify refinancing makes sense in your specific situation.
* I have included a section on the new Cash Flow ARM. A LIBOR based product which gives you complete flexibility in managing your mortgage.
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