No Closing Cost Refinance Program

No-cost home financing seems like an idea that’s too good to be true. But it’s here, and it’s waiting for homeowners at Family Mortgage. No closing cost loans can be used for either a refinance or a purchase transaction, although they are most commonly associated with a refinance. By paying points, you can buy the rate down. Well, the reverse is true. If you decide on a loan with a rate higher than the base rate, we as the lender are paid the opposite of discount points – called Yield Spread Premium. We can use these funds to pay some or all of your closing costs.

No one works for free, the slightly higher rate gives us the funds to pay all of the non – recurring closing costs. The no closing cost method does not increase your loan balance by one penny and can save you hundreds of dollars per month. Should interest rates continue to decline, you can simply refinance again to obtain additional savings.

  • You are not sure how much longer you will stay in the house or you may be relocated within 3 -5 year.s
  • Your loan balance is > $200,000.
  • You are not sure how much longer you will stay in this new mortgage. In Atlanta, the average loan pays off in less than 4 years. It typically takes 4 to 6 years to recapture closing costs if you decide to pay them when refinancing your home. Remember that you don’t just refinance to get a lower rate. It could be for a medical emergency, college education for your children, to remodel the house etc.
  • You believe that there is a chance that rates might go lower in the future. If they do, we can refinance you once again with no costs. As part of our service, we will keep an eye on the rates for you and contact you when it makes the most sense to refinance. Then, you will be able to lower your payment, twice, for FREE!. We have a number of clients that have done this 3 or 4 times over a 5 year period. That is like winning the mortgage lottery!!

Mortgages are traded on the securities market at the market rate, which is called “par”. The market will pay what’s called “an above par premium” (called yield spread premium) for rates in excess of par. Mortgage lenders can then turn around and use this money to pay for the typical costs of closing – origination fees, appraisals, credit reports, title insurance and attorney’s fees.

For example, let’s assume that a couple purchased a home in 2002 with a $200,000 mortgage at a certain interest rate and paid closing costs. Today let’s assume the market interest rate has fallen by 1%. It doesn’t make a lot of sense to pay closing costs a second time for only a 1% drop in the interest rate. However, this same couple could refinance with no closing cost and get a rate that was 3/4% better. This would save them approximately $150 per month and cost them nothing!

The rate on a no closing cost loan is slightly higher than the rate on a loan with closing costs.

Your loan will have an interest rate that is slightly higher than the rate available for a loan where you pay your costs and/or points. Because the loan has this higher interest rate the lender is paid a service release premium.  We use this service release (called the yield spread premium) to pay all the costs.

You are provided with a full “HUD 1″ settlement statement showing a lender credit for all normal closing costs.

Since you are not paying any closing costs, we can keep your loan balance exactly the same if you wish. You will pay for the appraisal up front, but will be reimbursed for it at closing.  However, the borrower is responsible for 2 items:

  • Pre-paid interest. This is interest from the date the loan closes until the end of the month. This interest charge takes the place of the first month’s mortgage payment. For example, if your loan closes on March 20, you would be charged for 11 days worth of pre-paid interest and your first mortgage payment would be May 1 (you don’t make April payment). The purpose of pre-paid interest is to bring you up to speed with the bank’s monthly cycle of collecting payments on the first of each month. Pre-paid interest can be rolled into the loan amount if the client wishes.
  • Escrows. The client is responsible for funding an escrow account with the new lender for the purpose of having the lender pay the property tax and homeowner’s insurance bills when they come due. The amount escrowed depends on what part of the payment cycle you close in…it can be as few as 2 months or as many as 12 months. In the case of a refinance, you will receive a check for a similar amount from your old lender within 30 days of closing for the balance of your escrow account with them. Escrows can be rolled into the loan amount if the client wishes to avoid having to wait for the check to come back from their existing lender.

One of the least understood elements of a No Closing Cost Mortgage is the correlation between the size of the loan and the interest rate. In general, the lower the loan size, the higher the interest rate that will be charged to facilitate paying the closing cost.

Let’s take an example to illustrate the point. You have a loan amount of $100,000. The closing costs are $2,200 or 2.2 %. So the interest rate charged would need to yield 2.2 discount points.

Now let’s go to the other extreme. You have a loan amount of $325,000. The closing costs are $3,300 or 1.01 discount points. So the interest rate charged would need to yield 1.0 discount points. We would need nearly 2.5 times more yield on the smaller $100,000. loan.

Typical break-even point is defined as the total closing costs divided by the monthly savings that the lower interest rate option provides. Said another way: the time required to recapture the closing costs you might pay with the monthly savings provided by the lower interest rate.

Who Should Not Choose A No Cost Loan?

  • You believe that rates will never go lower than they are now and you are not planning to move for at least 5 years.
  • You believe that rates will never go lower than they are now and you are not planning on needing to tap the equity in your home for any reason for at least 5 years.
  • Your loan balance is < $200,000 and your credit is not very good. The exception to this is if you have a smaller loan balance and you think you will definitely be out of the house within 3 years. The smaller the loan size, the higher the rate will need to be to get enough yield spread premium from the lender to pay your closing costs. See comparison for your personal loan amount.