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30 Oct 12 No Cost Refinancing Can Save You Big Time

BankRate published a recent article, claiming that there is “no such thing as no-cost mortgages.” The article asserts that lender fees and closing costs are covered by a higher mortgage rate. According to Jake Emmons who works as a loan manager at V.I.P. Mortgage in Aliso Viejo, “the no cost mortgage, typically costs less than .25 of a point.” Financially speaking if a borrower keeps the new mortgage for thirty years,(that means that the borrower never refinances this loan) that is doesn’t pencil out to choose the refinance with no closing costs, but how often does that happen? According to a recent survey at the Mortgage Bankers Association, more than 35% of homeowners that refinanced in 2011 or 2012 have done multiple times. Following this logic, it would be difficult to argue that the “average borrower” will pay off their existing mortgage with 360 payments prior to refinancing. Of course with refinance rates at record lows, there will be a point in time when rates start rising substantially and homeowners that have record low rates actually stop refinancing. In most cases, a no cost mortgage is paid by the lender in what is called “yield spread premium.”

The Most Significant Benefits of a No Cost Refinance

  • New mortgage balance does not increase
  • Borrowers that refinance frequently would save thousands by avoiding lender fees
  • Preservation of savings because people would not have to come “out of pocket” to pay closing costs
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