If you are looking to refinance your mortgage loan, the vast majority of lenders can pay for your non-recurring closing costs. This type of refinance product is actually known as a no point no fees mortgage refinance, but is often referred to as a no closing cost mortgage refinance. This will therefore allow you to close your mortgage account with less upfront fees.
Closing cost that are typically paid with this type of mortgage product include title and escrow fees, appraisal, lender fees, credit report fees, and any other expenses which are deemed as non-recurring over the life of the mortgage loan. However, you will always be required to pay the recurring costs at closing, regardless of the lender or mortgage product you have chosen.
A no closing cost mortgage refinance will typically involve a borrower having to accept a slightly higher rate than a normal no points’ mortgage. This is generally about 0.25% to 0.5% higher. The items that typically do not qualify as non-recurring closing costs will include property taxes, interest, and insurance.
How do you know if a no closing cost mortgage refinance is right for you?
The most popular time to take out they no closing cost mortgage refinance is when interest rates are declining. This will allow a borrower to hopefully lock into an interest rate that is lower than they are currently paying. However, if they choose to have a no closing cost mortgage, and therefore save on upfront fees, they will need to ensure that the refinance interest rate is significantly lower than what they are currently paying.
No closing cost mortgages were initially introduced into the marketplace during the early 1990s. With that said, many people still refer to this as a new or unusual loan product, as no closing cost mortgages have only recently gained in popularity. It must be said that with the increased scrutiny on lenders, due to the global economic recession and the sub-prime market, many lenders will not consider a no closing cost mortgage refinance for a loan amount under $250,000.
As mentioned, a no closing cost mortgage refinance is also referred to as no point, no fees loans, and if the truth be told this is a far more accurate description. It is important to realize that all loans will have costs associated with them and these costs will typically fall into three categories:
Points – this is essentially prepaid interest on a loan. Points are often referred to as discount and origination fees, whereby discount fees are points that are paid to a lender who will actually funds the loan, whereas an origination fee will go to a lender who processes a loan. One point will generally equal 1% of the loan, therefore on a $200,000 mortgage one point will be equivalent to $2000 and two points, $4000.
Non-recurring closing costs – these will include appraisal, credit, title, notary, recording fees, escrow, and lender garbage fees. Lender garbage fees generally include document preparation fees, underwriting fees, administration fees, and processing fees. These fees are usually directly associated with a borrower obtaining a loan, and therefore you would not expect to pay them outside of the loan process.
Recurring closing costs – these costs will include items such as your current mortgage interest, property taxes and insurance. These are costs that you will have to pay regardless of whether you are obtaining a new loan or a mortgage refinance, and therefore these fees will still need to be paid, and this may occur at closing.
A lender will generally use something that is called the yield spread premium, which is obtained through an increase in a borrower’s interest rate in order to pay for their non-recurring closing costs. A prime example of this is if a borrower seeks a mortgage of $300,000, and they find that their non-recurring closing costs are equal to $2500. The lender will then increase the rate of the loan in order to receive an additional point, and this will typically require a 0.25% increase in the overall interest rate.
As previously mentioned, a point will be equal to 1%, and therefore in this case this would equal $3000, which is more than enough to cover the borrower’s $2500 in non-recurring closing costs. In this scenario it is likely that the lender will keep the additional $500 as an added profit on the mortgage loan.