Spokane WA Refinance – Beware The “No Cost” Loan

Have you ever wondered about those ads you see for a “No Cost” Loan when refinancing your home?

When you call the lender advertising such a loan you will likely hear a pitch that goes something like this – “the benefit of the no cost loan is that when rates go down another 1/4% you can just refinance again!”

Sounds great but it’s an empty premise, and not based upon any sound financial analysis.

I do know of at least one person that benefits greatly from this type of loan – the loan originator and the lender they work for.

This is a great way for the loan originator to churn their client pipeline easily and profitably, earning commissions on your loan each time rates trickle down a smidgen with small benefit to you…if any.

It IS possible a no cost loan might, in fact, be the best option for you.

But that can only be determined after a detailed conversation with a mortgage professional about your financial situation, and a discussion of how long you think you’ll have the new loan.

The length of time you are likely to keep the new loan is truly the accurate method to use in determining what interest rate and cost combination best suits your needs.

Make no mistake – there is no such thing as a No Cost loan.  And it doesn’t matter if it’s a Conventional loan, FHA, VA, or a USDA Rural Housing loan.

• The mortgage originators, loan processors, Underwriters, and other employees need to be paid.
• There’s office rent and utilities to be covered.
• Then you have all the other service providers like the appraisal company, the title and escrow companies. There’s no way they are providing their product and service for “no cost.”

The costs must be paid for in some way.

Lenders will typically cover their internal overhead by charging an Origination Fee (a percentage of the amount you borrow), or as a flat fee. The flat fee will typically be labeled as an Underwriting Fee, a Doc Preparation Fee, or Admin Fee.

Property valuation reports are produced by independent appraisers – they are not employees of the lender – and appraisal costs can run anywhere from about $400 to $600.

The Title and Escrow companies collect fees that are on a sliding scale based upon how much money you borrow. The fees increase as your loan amount increases. That makes it difficult to provide a range in an article like this, but typical fees would be in the $1,000 to $1,200 range for refinancing a $200,000 loan. If you are buying a home the fees will be a little higher because there is an additional title policy required.

I haven’t even touched on all the other costs that might apply to your particular refinance or purchase scenario. There might be an inspection fee for the property, and you could have septic and/or water tests completed. Then there are recording fees charged by every county recorder’s office.

Just a very rough estimate is that there is $2,000 to $3,000 in real costs in EVERY home loan – and that’s ignoring the wage expense of the lender’s employees.

So how does a lender get away with advertising a “No Cost Loan?”

In a “no cost” loan scenario the lender is covering the costs by charging you a higher interest rate for the life of the loan. This might be a very good deal for you in the first couple of years, but if you keep the loan long enough the higher interest rate eventually erodes all the benefit of not having to pay costs up front.

Don’t let a lender “sell” you a program – have them analyze your specific needs and then ask them to provide 2-3 different loan options so you have all the facts so you can make an informed decision.

To find out if a “No Cost” loan is the smart choice for you, give us a call – we’d be happy to help you explore your options.

Related Posts

• Is It Hard To Get A Home Loan In Spokane, WA?
• Spokane Washington USDA Rural Home Loan Applicants – Don’t Miss October Deadline!
• Using A VA Home Loan When Relocating To Spokane WA And Fairchild Airforce Base
• USDA Rural Home Loans, A True Zero Down Home Loan
• Seven Things Your Agent Should Know About Your Mortgage Approval