No Cost Loans, No Cost Refinance

This new loan became more popular with each "refinance boom." First, it gained popularity with the FHA & VA "

streamline refinance

," then with conventional loans. What is

"no cost refinancing"

? How is that possible? If there truly is no cost to the borrower, the interest rate would be considerably higher than the rate delivered to the borrower if closing costs had been incurred. A higher interest rate means higher payments, so the "cost" is incurred or paid for over time. Essentially, the "value" of that loan, with the higher rate and payments, when sold to Wall Street generates enough income for the seller to pay for the related funding expenses (title, escrow, underwriting, etc.) and still retain enough net profit to create an economically beneficial transaction.

This loan is predominantly utilized by only those borrowers who can meet acceptable credit standards. If able to qualify, the justification for this choice becomes a timing issue.

Why would I want a no cost loan? There is only one reason to select this type of transaction, if it is available you'll only be in the loan for the short term. When paying costs, will the loan be held long enough so that the lower payment achieved by paying costs recoups the investment of those costs? (Tax deductions should typically enter the equation as well.) The answer to why a borrower would chose the no cost option then becomes clear. On a refinance, if your no cost rate is less than your current rate and you'll only keep the loan / property for a short time (say 2-4 years) and you can qualify, then a no cost loan is for you. On a purchase the reasoning gets less clear, primarily because of tax deductions - consult a loan professional AND an accountant!

One Touch Lending has funded plenty of no cost refinances for our clients after they have clearly understood the risks versus the benefits of this type of loan. When our borrowers were able to qualify, some found there no cost result to be huge win!