The other day, a Redmond home owner contacted me for a quote to refinance their home. They specifically requested scenarios for “lowest possible interest rate without paying any points or closing costs“.
I can understand why someone would request this – especially considering some of the radio and television ads that are repeatedly aired seeming to promote these things. The only problem is that there really isn’t such a thing as a “no closing cost” loan. There are costs associated with originating a mortgage loan and mortgage companies are not charities nor do they have a magic wand to make closing cost disappear. Someone pays for them and it’s the consumer…and good luck trying to find this in their fine print. 🙁
With a refinance, closing cost can be paid for several ways, including:
- Out of pocket. The home owner brings funds in at closing to pay for the closing cost.
- Financed into the mortgage. If there is enough equity in the home, the home owner can opt to have the closing cost financed into the new mortgage by having a higher loan amount than the existing mortgage balance.
- Rebate credit – higher interest rate. A rebate credit is when the interest rate is increased which provides a credit to be applied towards closing cost. Closing cost may seem to be reduced, however the home owners is actually paying for the closing cost in their monthly payment.
- Lender credit. Some lenders may offer specific credits that do not impact the pricing of the interest rate, such as our Home Town Hero credit towards closing cost.
So you see, home owners can either pay for closing cost by writing a check, increasing their loan amount or their interest rate. Sometimes, depending on how pricing is with mortgage rates, it may make sense to opt for a rebate credit or to price your rate without points – it all depends on what your long term goals are.
For the Redmond home owner who wanted the lowest possible rate without paying points or closing cost, this simply wasn’t possible for their scenario. We work with several lenders and when pricing out their refi, we didn’t have any lenders offering rebate credit – so the best pricing I could offer them based on their financial goals was a scenario without points (aka priced at par). They could increase the loan amount to prevent them from bringing cash in at closing should they chose.
Side note about closing cost and refinancing, many applications are being approved without an appraisal which of course helps to save on closing cost. And if you have an existing reserve account for property taxes and insurance with your current mortgage lender, you will receive a refund of that balance a couple weeks after closing which will help off-set the cost of starting the new reserve account for taxes and insurance with the refi.
Bottom line, you have choices with how your closing cost and interest rates are structured. Be sure to ask your mortgage professional for a total cost analysis to review your options so you can make an informed decision.
If your home is located in Redmond, Tacoma, B’ham or anywhere in Washington state, I’m happy to help you! Click here for a detailed mortgage quote.
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