No Cost Refi

May 18th, 2011 (03:11 pm)

An online mortgage lender is advertising heavily lately using an old tactic that needs to be explained, so people are aware of what they’re really offering. The advertisement starts out with a question to the effect of “Do you know if mortgage rates are going up, or are they going to go down?” It then goes on to say that while we don’t know the future, this lender is offering to refinance your mortgage today and to cover “all or most” of the closing costs if rates go down in the event you refinance again in the next few years.

This is actually a good strategy from both the perspective of a borrower and the lender. It’s true that if refinancing actually makes sense at this time, we should go ahead and refinance with certain assumptions of how long we expect to be in the home, our risk tolerance, future income increases, growing family needs, future planned expenses, etc. This strategy would offer savings in the event that rates go back up, and even more savings if rates go down further. Sounds great, right?

The truth is that lenders can refinance most mortgages with little or no closing costs anyway. It’s very simple. It’s so simple, it’s hard to believe that more lenders do NOT promote it. Here is an example: John and Mary Borrower have a $150,000 loan, they can refinance today on a 30 Year Fixed Rate mortgage at 4.625% with about $1500 in closing costs. If their current $150,000 mortgage is at 5.25%, it will take them about 19 months to recover the closing costs they spend now to refinance with their new lower interest rate. Now John and Mary plan to be in their home for at least 10 more years and don’t want to take any risk their payment could go up, so this makes a lot of sense for them refinance right now.

There is often a fear though that we might refinance now, spend $1500, and then see rates go down further and want to refinance again. It’s true this could happen. It’s just as likely though that rates go up wiping out the chance at any further refinance savings.

John and Mary do have another option though: They could refinance RIGHT NOW WITH NO CLOSING COSTS. John and Mary actually have the option of refinancing at 4.875% with NO CLOSING COSTS at all. They would immediately save almost $47 per month with no up-front costs.

It’s not as big of savings per month, but then again, if rates do go down further, they have spent nothing now. The point of this example is that this option is available whether it’s the first or the fifth time we refinance, and the advertising lender doesn’t explain this. They have conveniently made it look like they are going to “take a loss” for repeat customers.

We also don’t know how competitive their rates and fees are on this first refinance they’re offering, but given they’ve opted to advertise on the radio and online while supposedly risking “taking a loss” on future mortgages, yeah, I too am not falling for this one.