Frequently Asked Questions for No Closing Cost Refinance
1. Who is paying the actual cost related to the refinance?
2. Why am I getting a higher rate than my co-worker who called you the same day?
Since lenders are paying the expense for your no-closing-cost refinance, they expect to recover the cost in the next 3 to 4 years through your interest payment. If you have a bigger loan amount, the lender will give you a lower rate. Vise versa, you will expect a higher rate if your loan amount is smaller. Also if you get the loan originally from us, we should be able to refinance you to the same lender to avoid 0.3% GA intangible tax, resulting in a lower rate. On the other hand, if your house value has decreased and we have to put you into Obama's Refinance Plan to avoid mortgage insurance (PMI), you rate could be higher. Other factors to affect your rate include your credit score, your loan-to-appraisal-value ratio (LTV) and if you wish to do cash-out refinance.
3. Do I have to bring any money to the closing table and how do I avoid it?
There are "pre-paid items" that you may have to bring to the closing table. They are NOT closing cost and will be fully recovered after closing. The pre-paid items include (1) 30-day pre-paid interest, and (2) escrow you need to setup with the new lender. Let's assume you close in the 20th of the month, you will pay 20-day interest for the current lender and 10-day interest for the new lender. You will skip one month payment due the first day of following month to recover the 30-day interest. You will also get refund of the escrow balance from current lender to recover the new escrow amount. Therefore, all pre-paid items are fully recovered. Assuming you have enough equity, you can increase the new loan amount to cover the pre-paid items and, after closing, send the recovered balance to the new lender or keep it. That way, you can avoid bringing money to the closing table. The total amount of the pre-paid items is your skipped monthly payment plus your current escrow balance.
4. I have paid my mortgage for 2 years and now I have to re-start for 30 years (or 15 years). How can I compare the saving?
Your monthly mortgage payment usually consists of four parts: principle, interest, insurance and tax. Monthly insurance and tax are calculated by simply dividing your annual insurance and tax by 12. Monthly interest is calculated by: (current loan balance * interest rate / 12). The rest of the payment is the principle being used to reduce the loan balance to a new balance amount for next month. Therefore, you pay interest to the lender every month based on current loan balance and interest rate. Since you get a lower rate with refinance, you pay less interest to the lender every month. There is another way to look at it. You can choose to pay off the loan in two year less --- in 28 years for 30-term loan or 13 years for 15-year-term --- and then compare the monthly payment difference. You can use following link to a calculator to figure out the monthly saving.
5. Should I refinance now or should I continue to wait for a better rate?
First of all, nobody can predict the financial market. If you choose to pay the closing cost, you may debate with yourself if rates have dropped to the bottom. However, if you opt for the no-closing-cost refinance, there is no point in waiting. You pay nothing for a lower interest rate and you start to save money the day you close the refinance. Better yet, if the interest rate drops a week prior to the closing, we might be able to float you down to the lower rate. If the rate continues to drop after closing, we can refinance you again after four months. Furthermore, once we refinance you to our preferred lender, subsequent refinances with the same lender will avoid state taxes which results in a even better rate. In the past, some home owners refinanced their home loans with us three or four times in a year.
6. What is the difference between "no-closing-cost" refinance and "no-cost" refinance?
"No-cost" refinance usually means you do not have to bring cash to the closing table. It is achieved by getting a higher loan amount to cover the pre-paid items and closing cost. You may pay closing cost with "no-cost" refinance. If you do choose to pay closing cost for the refinance, you should expect a much lower interest rate and you should plan to stay in the house for more than 3 years to recover the closing cost. We do have home owners who choose this option and it is actually more popular in the ads you get from mail or on TV. For further questions, please give us a call.