How to No Cost Refinance Before it’s Too Late

I’ve focused mainly on personal finance issues the past couple months, but I wanted to shift gears today to real estate.  Real estate has gotten a bad rap in the recent years due to the housing bubble, but home prices and interest rates are at rock bottom right now.  In my opinion, now is one of the best times to buy if you have the rest of your finances in order.

In college, I saved as much as I could in order to invest in my first property, a 2 bed/2 bath condo in San Diego.  Real estate is one of the only investments in which you can put down as little as 20-35% as principal and still get back 100% of the investment gain.  I always recommend real estate to investors who have already maxed out their 401k and IRA’s.  It’s also a great alternative for anyone looking to diversify away from stocks and bonds.Most property owners know the basics about refinancing and how it can easily lower their monthly payments.  In fact, there is an abundance of literature online that will help you decide if refinancing is even worth it: how much you’ll save, how long it will take to break even, etc.  But it should never be necessary to pay fees to a broker to refinance your loan.  Mortgage companies should be competing for your business, not the other way around.  A no cost refi achieves this and more.

How it Works

Banks and mortgage brokers see your loan as an opportunity for free money.  They are willing to sacrifice some of the up front costs that may total just a few thousand in order to receive the interest over the life of your new loan.  Over a 10-20 year time period, the amount of interest paid will significantly outweigh any closing costs.

Although you will never get the lowest rate possible with a no cost refi, there is truly no cost.  People often pay thousands of dollars to refinance, only to see the rates drop within the next couple of months.  A no cost refi offers protection against further rate drops, because you can just refinance again, at no cost!  There is often a 90 day waiting period to no cost refi with the same company, but there are many companies to choose from.

Truly No Cost

You want to make sure you are actually pursuing a no cost refinance and not a no cash refinance.  No cash essentially means they will add the closing costs to your principal, while no cost literally means no cost.  Here is a list of some online companies with the lowest no cost refi rates around:

These companies offer some of the most competitive rates around, although you should thoroughly research any company you decide to use. Instead of paying points, they will actually give you a lender credit depending on the rate you select. Typically, a no cost refi will be at a slightly higher rate; .125% to .25% higher, than a traditional refinance. In my eyes, this is really the only down side.

My Experience

This was my first refinance so I decided to go with a well known company in Quicken Loans.  I refinanced from a 30 year fixed loan at 5.25% to a 7/1 ARM at 3.75%, saving myself over $200 a month.  They were extremely easy to deal with and the whole process took just under a month.  However, they did try to tie my escrow prepayment into my new loan.  This is something you don’t want to do because it will add to your loan amount.  All the numbers can be a little confusing, but make sure that the lender fees(including appraisal, credit check, etc) and government recording fees are less than the lender’s credit and you should be just fine.

Have you tried a regular refinance or no cost refinance?  Are there any drawbacks to a no cost refi that I’m missing?

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

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  1. Kelly says

    You just inspired me to try (yet AGAIN) to find a refinancing option that may make sense. So far so good, keep your fingers crossed my appraisal comes out ok tomorrow!

  2. Kelly says

    Thanks very much – I’ll have to do some of this! I know I am definitely over an 80% LTV but with rates so low and my credit score even paying some PMI at the rates I have been quoted appears to be a good deal. I definitely put work into the house so I will be sure to mention that.

  3. says

    No cost refi’s are usually reserved for ARM’s. If you don’t want an ARM that is a drawback. The longest I have ever lived in the same house is about 7 years. But, the house we have now we will keep forever. Even if we move. So we locked up a nice 30 yr mortgage, which is hard to find a no cost refi for.

    Penfed has some of the best no cost rates I have ever seen. They had a 1.99% 5/1ARM going a while back.

  4. says

    Ah, I forgot about Penfed, is it military only though? I’ve seen a few companies offering 30 year fixed no cost refi’s but obviously at a higher rate. I think it only makes sense if you know with certainty you’ll be keeping the house forever. You’ll probably end up paying it off before 30 years anyways ;)

    • says

      no, anyone can join penfed. A $20 tax deductible donation to NMFA or $15 fee paid to Voice’s for America’s troops will get you in the door. It is money well spent.

      And the 1.99% I referred to above is a Home equity Loan (which can be used to pay off the mortgage).

    • Kelly says

      I am trying to go with a 30 year just because I think my condo would be a good rental property and I would like to try to hold onto it if I can even when I move on to a different house – would be nice to have a condo downtown. Since I have no idea what I’d do and Amerisave was doing a 4% no cost for a 30 year I went for that even though it is a bit higher than the ARMs would be. Thanks for the tips on the appraisal – I did my research and shared lots of info today. Hopefully it helps!


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