Zero Closing Costs for Re-Fi: Pro's and Con's

[dzcinci]

There is a lot of misconception that there are expenses associated with completing a refinance. There can be, but it is not required. Many companies will offer (what is considered negative 'points') to offset the typical closing costs associated with a loan. You do 'pay' for this in an higher loan rate (typically 1/8 - 1/4 percent).

WATCH OUT that it truly is no closing costs and they are not just rolling the costs into the loan.

I consistently hear closing costs presented as a barrier for people to refinance when they anticipate staying in the property less than 3 years (or have less than 5 years remaining). They end up sitting on a 5% rate for several years when they could have dropped to a 3% rate at no cost nor risk (no need to even calculate a break even point as you are positive in month 1).

Zero Closing Cost Refinance:
Good for: People that have good credit and appropriate LTV for the loan; May not stay in the property long; May want to refinance again soon (laddering down as rates drop); Only have a few years left on your loan; Paying off loan aggressively.

Bad for: People whose credit does not qualify them for an attractive rate; Appraisal does not support the loan amount; Plan to stay in home for many years and interest rates increase so no desire to refinance again.

I stand on the table and pound my shoe for people to refinance who are sitting with these high rates, but there is this persistent belief that it is not 'worth the cost' due to X, Y or Z. (Maybe it is not worth the hassle, but that is pretty easy now with closings in your home, etc..)

Other thoughts in this area?

 

[Matt]

They end up sitting on a 5% rate for several years when they could have dropped to a 3% rate at no cost nor risk (no need to even calculate a break even point as you are positive in month 1).

It is breakeven because your example rate of 3% is below the 5% (even though it may be a bit higher than they could get if they didn't roll the costs in? Just trying to figure out where you are coming from, as it sounds logical.

Are early surrender fees ever an issue here?

 

[dzcinci]

Sorry if I was not clear. If someone can drop their rate even 0.25% with no actual closing costs, they are ahead even in month 1. (When they pay a closing cost, the interest rate delta and/or their expected duration in the loan has to be big enough for them to reach a break even point and I think this calculation/uncertainty keeps people from refinancing.) If you can lower your rate at no cost, do it now. Now!

When I was refinancing this way, there never was a surrender fee. I started around ~2000 with about a 6% 30 year mortgage and whenever I could drop it 0.5% or more I would refinance it with no cost, laddering it down to 2.75% now. I probably refinanced ~7 times over the period. IIRC the shortest duration between refi's was ~ 6 months and never experienced an issue or questions about it.

The refi really has become simple. Most of mine were remote refinances. Apply online. Get a call and then email with the completed application. Sign and scan/fax it back. Rate is locked. Schedule/host the appraisal. I usually had to 'front' the appraisal but this amount was credited at closing (this protects the institution from out of pocket costs if I choose to back out). A couple of weeks later a FedEx would arrive with the papers and a notary would call to schedule a signing appointment in our home.

I have seen some discussion taking this concept even further (the negative points concept). Refinance with -3 points, getting a fat check with each closing but also paying quite a bit higher interest rate. Repeating the process on some X frequency and hoping that a lender does not get upset with the frequency and reject their loan application, as they would be stuck with a high interest rate loan with difficulty getting a lender to approve them soon. This mirrors the risk tolerance discussion in some other posts, but repeat refi's with zero closing cost should not be an issue as it is easy to explain and not an attempt to game the system.

 

[cocobird]

I fully agree with the way you have handled your mortgages. I have done the same as you - refinancing whenever the rate dropped below what I had as long as it was a no cost loan. The biggest "cost" that generally occurred was when there was an overlap between the old and new loans. Although not required for a refinance, so many financial institutions treated these as "home equity" loans and required the three day rescission period run before releasing the funds. Since the cost was relatively small, we simply paid it. I worked with a broker by e-mail and telephone. The documents were sent by FedEx or messenger if necessary. Since I worked with the same broker for each refi, he generally needed minimal documentation to complete the process and we both knew what we needed to do. In fact, he would notify me whenever a cheaper loan was available so that I didn't even need to watch interest rates. It was quite easy.

 

[PedroNY]

Why not just pay cash and not have a mortgage? I am just kidding around. As for surrender fees, from what I recollect if you have a single dwelling house the lender cannot charge you any surrender or pre-payment penalty fees, maybe that is only true in the North East, but that's what I recall.

Cheers,

PedroNY