Ask Stacy — Can I Really Get a No-Cost Mortgage?

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Couple Getting Mortgage
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Mortgage interest rates remain near historic lows. But as the economy continues to improve, so do the odds of higher interest rates, which means now could be a great time to refinance. But before you consider a new mortgage with a lower rate, consider all the costs.

Following is a question I originally received some time ago. While the numbers have changed a bit since it was originally submitted, the advice remains the same.

My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee for a rate of 4.5 percent. My current rate is 5.375 percent.

What’s more beneficial for me? The difference in price each month is about $100 less if I get the re-fi at 4.5 percent. What should I do?
– Corinne

Here’s how Corinne — and anyone else in her situation — can answer their own refinance question.

Simply divide the cost of the refinance by the monthly savings. That will reveal how many months it will take to make the refinance profitable.

For example, if the fees you pay to refinance are $2,000 and you save $100/month as a result, it will take 20 months to recoup the cost. If you’re going to stay in the house exactly 20 months, you break even. If you move sooner, you lose money. For every month you stay longer, you come out $100 ahead.

Corinne says she’ll have no cost to refinance: “My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee.”

If we really could refinance at no cost, we should do so every time rates fall by even 1/10 of a percent, since there would be no cost and all benefit. But despite what the lender advertisements say, is there really any such thing as refinancing at no charge?

Fee-free re-fi? Not likely

There’s no such thing as no-cost refinancing. I’ll use myself as an example. Here are the actual expenses I paid when I last refinanced my mortgage:

Recording fees: $175.00
City/county tax stamps: $600.00
State tax stamps: $1,050.00
Credit report: $25.00
Underwriting fees: $595.00
Escrow fee: $150.00
Title search: $165.00
Title insurance: $1,125.00
Title endorsements: $140.00
Express mail: $75.00
Total expenses: $4,100.00

I did lots of negotiating to keep my expenses low (see “How to Buy a House — Getting the Best Deal on a Mortgage”), and for the most part I was successful. The fee associated with the actual mortgage loan — the underwriting fee — was $595.00. But as you can see from the above list, that’s not even close to covering all the fees. In my state (Florida) title fees and tax stamps are established by law, and there’s no getting around those. And title insurance and escrow aren’t free.

So when approaching a refinance, be aware of the entire cost of refinancing your mortgage. Sure, your lender could tell you they won’t charge fees. But not all the fees pertaining to your mortgage are charged by the lender. Of the $4,100 above, perhaps the lender could have waived the underwriting fees ($595) and the credit report ($25). That would have saved me $620, but that still leaves $3,480 they can’t waive. Why? Because they’re fees being charged by others in the process — namely the county, state and title company.

Still, if there’s a way to way to get lender fees waived, why didn’t I do it?

Because there’s no such thing as a fee-free lunch. Whenever you see an ad for a no-cost mortgage, what you’re undoubtedly encountering is a charge you don’t see: the interest rate.

If Corinne agrees to pay 4.5 percent when 4.25 percent is available elsewhere, that quarter-percent is money the lender is making and Corinne is losing. That’s why you’ll often see lenders offering no-fee mortgages: Sure, there’s no underwriting fee, like the $595 I paid. But these loans are often at higher rates, which results in the lender making a lot more over the term of the loan than $595.

Ever see those new-car ads when they scream stuff like, “Push it in, pull it in, drag it in! This weekend your trade-in is worth $1,000!!”? Same concept. Sure, they’ll give you $1,000 for your barely running beater, because they’re going to jack up the price of the car you’re buying by whatever they’re losing on your trade-in.

Bottom line? If you’re considering a refinance, go into it with your eyes fully open. Find out how much it will actually cost to refinance your mortgage, including government and closing costs. Then, shop your rate hard. Check out a mortgage search tool like the one we have here, ask around locally and talk to your existing lender. Shop not only rate, but also APR. Only after uncovering all the costs and the most competitive rates will you be in a position to make an informed decision.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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