No Cost Loan Myths
I recently had a client mention that they saw an advertisement from one of the big well known banks about a no cost refinance. How does this work? Why would some companies charge fees to purchase or refinance and others do not?
Well it’s quite simple. They ARE charging you, but you may not realize it.
To obtain a loan for the purchase of a home or to refinance your current loan there are costs involved to all the parties doing the work. It costs everyone money….. Period. There are fees for processing, underwriting, appraisals, title, recording etc. (for a complete breakdown, contact a trusted advisor)
Whether or not you realize you are paying for these fees is the question. Do you really think any company would just give you a product or loan for free when it costs them money to do it?
There are two ways for the bank/mortgage company to do this. See examples below based on a 400,000 loan with $3500 in fees. (Fees are estimates only, without an impound account and will vary depending on your particular scenario)
1. Normal 400,000 loan, with you paying the costs out of pocket
2. Same loan, adding the costs to the loan amount.
3. Same loan, keeping the loan amount the same (making you think it’s free) but adding the costs to the interest rate.
So which is the best way to go? Well it depends on your situation. If you don’t have the funds to pay the costs up front to keep your payments the lowest, then I would recommend the second option. We would then add the costs to the new loan amount. The third option, which is what most banks will advertise as a no cost loan (Keeping your loan amount the same) is the most costly loan because the interest is higher.
See below the difference in interest you would pay over the 30 year term. The overall cost from paying the costs out of pocket isn’t much different than adding it to your loan amount although the payments are slightly higher. But adding it to the interest is the highest overall cost. Although you are borrowing the same loan amount, the interest in the long run is much more over the long term.
So in conclusion, is it really a no cost refinance? I think NOT!
So that old saying of……If it seems too good to be true?…….you know the rest……
This is why it’s imperative to deal with a professional mortgage consultant who will give you a written a loan analysis of your situation so that you can make an educated decision and know exactly what you are getting before you proceed.