Zero Cost Refinancing - Too good to be true???

Question

I often hear on the radio, companies claiming that they will refinance for absolutely ZERO cost to you. No closing, no nothing.... They claim that they make enough money on the interest.

There are a couple I heard recently, but the only one that comes to mind is Lennox Financial (sp?).

Anyone have experiences with places like these? Are they for real or will they just end up giving you horrible rates?

Thx

Answer 1

Many companies offer "no cost" financing, but what they aren't charging in hard fees they are making up for in the rate. In other words, no closing cost loan will have a higher interest rate than loans with closing costs, typically at least .25% higher.
If you plan to keep the loan long term, the amount of additional interest you would end up paying is most likely going to be substantially more than the closing costs you have "saved".
The only time I would recommend pursuing this type of financing is if you plan to refinance or sell within 5 years or less.
Also, keep in mind that most no cost offers are little more than marketing gimmicks. The ad will claim they have a no cost loan, but when you call you magically won't qualify for it. The lender will give a couple of people the no cost loans to avoid false advertising suits, but other than that it's usually just a hook to try and get you to call.

Answer 2

Very simply, you will pay a higher rate than you would get if you paid your own closing costs. It's kind of a reverse of paying points to buy your rate down.

Expect to have a rate about .5% higher than you'd get if paying full closing costs.

This is often actually your best deal, though. A refinance can cost 2-3% of your loan amount in closing costs. So it'd take 4-6 years to break even on paying those costs. Many people don't hold loans that long. A good loan officer will present you both options and help you decide which is best for you.

Answer 3

As the old saying goes, there is no such thing as a free cup of coffee. The same applies to mortgages. If the mortgage broker is doing a 'no cost loan', he is getting paid for his efforts via a higher interest rate charged to you. Any time you seek a mortgage, ask for a "Good Faith Estimate" of all costs involved. Shop around at various mortgage sources. I suspect you will discover that you are paying costs in terms of higher interest rates.

Answer 4

They must roll the closing costs into the loan or as previous posters had mentioned charge you higher interest rates. There are some closing costs that cannot be free such as appraisal, mortgage recording tax, title insurance, lawyer fees. They may not charge you application fees and points but you rates will be definitely higher.

Answer 5

If it sounds too good to be true, it is.

How would these companies make money if SOMEONE doesn't pay them? There are charges which are mandated by the city/county/state for transfer of leins.

If they make enough on the interest, you can believe that they are charging a LOT more for the interest. Remember, they have to get the money from somewhere and are being charged interest on that money (think of the Prime lending rate)... so how much extra will they be charging you?

Don't believe it. Never, Ever

Answer 6

yes, these deals exist. You will get a slightly higher rate that will subsidize your costs. If you are willing to pay your own costs, you will get a better rate... if you are willing to pay your own costs AND points, you will get the lowest rate.
there's no free lunch.

Answer 7

nothing in this world is free except love.

Answer 8

very good question