There’s Really No Such Thing

Even though a no-cost refinance sounds great, there’s really no free lunch.

It’s like marrying someone for their money. You might think you’re getting a great deal, but you’ll probably have to put up with your partner’s controlling, narcissistic, and disgusting ways. If you’re not physically attracted to him or her, then that’s a whole other set of problems to deal with.

OK, a no-cost refinance isn’t as bad as that. But there are always costs even if you can’t see them.

A no-cost refinance is a loan transaction in which the lender pays all the refinance costs.

Refinance costs includes: processing and underwriting fees, the appraisal fee, loan origination fees, title and escrow fees, notary fees, and courier fees.

These fees can easily add up into the thousands of dollars, making potential borrowers hesitate as to whether to go through with the refinance or not.

See some of the fees below I had to pay during my last refinance some years ago, but was mostly covered through credits.

Typical Mortgage Refinance Fees Chart

To boost business, lenders entice potential borrowers by covering all the fees so there is no out-of-pocket cost to the borrower.

If the borrower gets a lower mortgage rate without paying any fees, then the decision to refinance becomes easier. The only factor to really consider is the time and effort it takes to refinance.

No-Cost Mortgage = Higher Mortgage Rate

Lenders aren’t in the charity business. In fact, publicly listed financial firms have some of the largest market capitalizations in the entire S&P 500 index because they make so much money.

The way lenders make up for covering all refinancing costs is by simply charging a higher monthly mortgage interest rate.

It’s the same thing as the employer making you, the employee, feel great about their generous 401(k) matching and free or highly subsidized healthcare benefits. You might be getting great benefits, but it’s costing you in terms of a lower salary.

Mortgage rates are set in increments of 0.125% e.g., 2.5%, 2.625%, 2.75%, 2.875%, 3%, etc. Therefore, instead of paying 2.5% for a mortgage refinance with fees, your bank might charge you 2.625% or 2.75% instead if you want to go the no-cost route.

The longer you take to pay off your mortgage, the more interest income the bank will make. Banks know that on average homeowners own their homes for ~8.3 years. Therefore, they can calculate their potential expected profits with relative ease…

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