What's the deal with "no closing cost" refinancing?

Question

Is this for real, or just another scam? Does your credit rating enter into the picture on whether or not you qualify?

Answer 1

It is a scam, or rather, a marketing ploy. No one works for free and there are hard costs to outside vendors that always have to be paid. In order to avoid the borrower paying these charges the lender charges the borrower a higher than par rate and pays the costs (and their loan fee) with the Service Release premium that the lender pays for delivering the loan at a higher rate.

If you read the very small print you will see the statement that specifies that borrowers who elect to pay the 3rd party fees may receive a lower interest rate as well as the one that says that some fees on the "no cost" refi may be charged up front but refunded to the borrower at closing.

The object of the ad is to make the phone ring, which I am certain it does, but I'd be interested is finding out how many callers actually end up choosing the "no cost" refi at a higher rate and how many the lender is able to convert to a standard refi at the lower rate available.

Answer 2

It is for real. The borrower is usually charged a higher interest rate which means you will pay a lot more than the typical $3000 in closing costs over the life of the loan.

Credit rating is always involved in purchasing a home or refinancing. In todays world of the "credit crunch" I would bet it is becoming increasingly difficult to obtain and "no closing cost" loan.

Answer 3

Whether it's a scam or for real will depend on the lender. Some may say that when they mean they'll finance the closing costs into the loan. There are always closing costs, but sometimes the bank will actually pay them. This is especially true with home equity loans. Bank of America currently has a loan that the cst pays no closing costs, and that's for real.

Answer 4

It's one of those things that's 'technically' true. While they do have 'no closing cost' refinances the rates are higher. If you keep the loan for the whole term then you'll pay much more in interest than you save in fees. If you're planning on refinancing or selling quickly then you wouldn't pay as much in interest as it saves you in closing costs. It just depends on your situation which is going to be your best deal.
Easy way to determine this:

Take the difference in payments (the 'no closing cost' option has a higher payment) and multiply by the number of months you plan on being in the mortgage. If that number is equal or greater to your closing costs then it's a better deal to pay the points.

Answer 5

When a mortgage professional quotes you a mortgage there are 2 ways they make money. One you pay a point or 2 which is 1-2% of the loan amount plus closing costs. and you get a better rate. When you do a NO COST loan, there is costs of course just like with the options of paying points however, the person originating your loan gives you a higher interest rate, and the lender pays them money for the higher rate.

Example, You do a refinance and owe 200K on your home, you pay a point and closing costs of around $2200 and get a rate of about 6.375%
OR
You pay no points and no costs and your rate is 6.875% and the person makes 3.5% points in the back end from the lender he uses the money to pay the closing costs , and keep the remainder as his/her commision, NOTHING is free and they always make money, If you are working with a good mortgage professional, they should explain this to you, and also show you the options so you can decide which is best for you

Answer 6

It's real, you but nothing is free, the rate would be higher. A mortgage BROKER may be a better deal, for they have wholesale rates, not retail should as Counrtywide.

Just check around if the rates are the about the same go the one with the best program for you.