I recently closed on a no-cost refi and am really curious about the skepticism around them. People often say there’s no such thing as a ‘no-cost’ refinance, suggesting you end up paying in other ways. Yet, I don’t see it. A year ago, I bought a house in Texas for 1M with a $600,000 loan at a 7% rate. I shopped around and one lender kept offering better rates and finally gave me 6.675%. After making six payments, she offered a no-cost refi whenever rates improved, which they did. She recently got me a refi at 5.875% with all closing costs covered by lender credits. My monthly payment dropped significantly, and the loan amount remained the same, just the term restarted. I understand I could have gotten a slightly lower rate if I paid some closing costs, but it still seems like a great deal with no out-of-pocket expenses. So, why the negativity?
Many people just don’t get the concept of lender credits. Even in this interest rate climate, truly no-cost loans are rare, but if you started with a high rate, it’s possible.
It’s not that anyone dislikes the concept. It’s the way it’s advertised as ‘no-cost’ or ‘free’ when in reality, you’re just financing the costs. They’re still there. And the ‘lifetime free refi’ claim is misleading. You just did a refi and it wasn’t free. The problem is the misleading sales tactics used on people who might not be financially savvy.
@Ocean
You’re incorrect. There are definitely ways to refinance without increasing your balance or paying closing costs upfront. Sure, you might get a slightly higher rate, but when you consider the time to recoup costs between a paid and a no-cost refi, it often makes sense. Oh, and let’s avoid using ‘literally’, it doesn’t help your argument.
@Wil
You’re missing the point. Sometimes a ‘no-cost-refi’ does make sense, as already mentioned. But claiming they are ‘free’ or ‘no-cost’ is misleading. A higher interest rate is a cost—you will pay it monthly for the duration of the mortgage. It’s dishonest to claim otherwise.
@Ira
It’s about comparing options. If one choice is to pay $4000 and get a certain payment, or pay nothing and have a payment that’s $40 more, which is smarter? The break-even point is 8 years. Will you still be in this home then? Do you expect rates to improve?
@Wil
Pointing out someone’s use of ‘literally’ as a sign of immaturity is pretty ironic and a bit nauseating.
@Wil
It seems from your downvotes, you’re having trouble understanding my point. Literally.
@Wil
However, taking the slightly higher rate is indeed a cost.
Rory said:
@Wil
However, taking the slightly higher rate is indeed a cost.
It’s no cost compared to the loan you currently have, not compared to one you might get if you paid upfront.
@Lior
No cost and nothing out of pocket aren’t the same. I’m highlighting that there are costs involved. Using a higher rate to offset upfront costs doesn’t mean they don’t exist. Also, depending on your state’s transfer taxes, most lenders might not offer enough credits to cover all costs with current rates.
Is the APR 0.00%? If not, then it’s not free. Sure, you can incorporate the closing costs into the rate or loan balance. But in every case, these credits come with a higher rate than you could have gotten otherwise. I’ve even seen the closing paperwork of bigwigs in the industry, and they pay closing costs.
@Hadley
If you’re getting a lower rate without upfront costs and your principal doesn’t increase, why not consider it free?
Mai said:
@Hadley
If you’re getting a lower rate without upfront costs and your principal doesn’t increase, why not consider it free?
It might be better to say ‘no-cost’ rather than ‘free’. There’s no money out of pocket (aside from escrows, which you would have to pay regardless), and your loan balance doesn’t go up.
Mai said:
@Hadley
If you’re getting a lower rate without upfront costs and your principal doesn’t increase, why not consider it free?
It’s not free. While it might make financial sense, you are still absorbing costs that are rolled into the loan. You might find a lower rate elsewhere with similar financing options.
Looking at your figures, it seems like the loan balance hasn’t changed much, but it wasn’t entirely free. Could you share what your outstanding balance was at the start of this refinance?
Sky said:
Looking at your figures, it seems like the loan balance hasn’t changed much, but it wasn’t entirely free. Could you share what your outstanding balance was at the start of this refinance?
Thanks for pointing that out. After about 10 months, the principal on my original loan was $594,300. My new loan is $595,000, so the loan size compared to the payoff hasn’t really increased.
Sky said:
Looking at your figures, it seems like the loan balance hasn’t changed much, but it wasn’t entirely free. Could you share what your outstanding balance was at the start of this refinance?
That makes sense. The difference is minimal and you’ll reach the break-even point in just a few months.
It’s great to hear you got a deal you’re happy with. We offer a similar program for our clients, and they appreciate it as well. Ignore the negativity!
They aren’t technically free because your rate is higher, meaning you’re paying in a different way. Still, you’re paying less than before, which is what matters. Just be mindful of the refinancing terms and how they affect the overall cost.