What is it?
A mortgage program that allows the borrower to refinance his or her home without incurring any of the normal closing costs associated with obtaining a mortgage. The closing costs are not rolled into the loan amount. YOU DO NOT INCREASE YOUR DEBT. The borrower receives a cash credit from the lender at settlement which offsets the closing costs. In some cases, the lender credit exceeds the sum of the costs which results in the lender actually paying the borrower to refinance.
What’s the initial interest rate?
The rate is about 1/4 percent higher than a mortgage program that carries typical closing costs. There are no points, no title insurance costs, no appraisal fees, no recording fees, no underwriting fees, absolutely zero transactional closing costs.
For whom is this product appropriate?
There are several situations that would warrant a refinance with zero closing costs.
- Any home owner with a 30, 20 or 15 year fixed rate mortgage with a rate that’s higher than the currently offered zero cost rate. Traditional refinance programs that carry thousands in fees and closing costs requires a considerable drop in rate in order to justify the costs. Since the zero cost program carries no fees, dropping the interest rate by as little as 1/4 percent, or even 1/8 percent makes sense – instant savings.
- Any homeowner planning on being in the home for less than five or seven years can save even more money. There are zero cost 5/1 and 7/1 ARMs available that enable the borrower to refinance to an even lower rate and save more money. So if you have refrained from refinancing because you plan on moving within a few years, think again. A zero cost ARM refi might be right for you.
- Folks seeking cash out would want to consider a zero cost refinance. The borrower will net more cash because the closing costs are paid by the lender, and not deducted from the loan proceeds.
- Folks who have limited equity in their home can often benefit from a zero cost refi. The loan amount doesn’t have to be raised to cover the closing costs because there are no closing costs.
What are the benefits of this product?
The biggest benefit of a zero cost refinance is that it allows borrowers to be “nimble” with their mortgage debt. During the last 27 years, hundreds of PMC clients rode the wave of declining interest rates by refinancing to a lower zero cost rate. In 2000, for example, 30 year fixed rates were higher than eight percent. As rates slowly started to fall, folks with rates in excess of eight percent were able to take “baby steps” down and pay no points or closing costs. By the end of 2014, some home owners locked into 30 year fixed rates below 4% with no closing costs.
The zero cost refinance carries zero risk. If interest rates fall, borrowers can refinance again at no cost.
What about extending the term back to 30 years? I don’t want to go back to 30 years every time I refinance. I’ll never pay off the loan!
You don’t have to. We offer amortizations in annual increments from ten to 30 years. For example, if you are four years into a 30 year loan, we can refinance your existing balance on a new 26 year fixed rate term. This enables you to lower your rate, lower your payment and still pay off the loan within the same time frame as the old loan!
What about escrows and interim interest?
This point seems to trip up a lot of folks, thanks to the poor design of the federal Loan Estimate and Closing Disclosure.
Please read this carefully:
An escrow deposit to the bank for future payment of real estate tax and insurance bills are not an actual cost of the refinance because the homeowner will be paying his/her tax and insurance bills whether or not he or she refinances. The zero cost lender will collect for the initial escrow deposit at settlement but the homeowner should expect a refund check from the old lender after the loan is paid off. This typically balances out.
Interim interest in next month’s mortgage payment. That’s it. The old lender adds accrued interest to the balance of the loan that will be paid off. The new lender will collect the daily interest from the date of settlement until the 1st of the next month. This combined amount makes up the mortgage payment that you would have normally have to make if you didn’t refinance. So whenever a homeowner refinances, the first actual mortgage payment to the new lender isn’t due until after the first full month of the new loan has past. So if you settle on a refi on the 20th of June, for example, the old lender will add 20 days (June 1 – June 20) to the principal balance owed. Remember that mortgage payments are paid in arrears, not in advance. It’s the opposite of rent. Your June mortgage payment covered May’s interest so if you pay off the loan on June 20, you owe the old lender interest charged from June 1 – June 20. The new lender will also charge you 10 days of interest to cover June 21 – June 30. Bam! That’s your July mortgage payment paid at the refi settlement. You settle on June 20 but your first mortgage payment isn’t due until August 1st!
Okay, so I have to write a check at settlement even though it’s a zero cost refi?
Yes, if you don’t want to add the escrow deposit and interim interest to your loan balance. Many zero cost customers choose to increase their balance by rolling in the escrow deposit and interim interest. This results in a slightly larger loan balance, but the homeowner will end up with a little extra cash after the old lender refunds the old escrow account balance (and there’s no July mortgage payment).
Or you can keep your balance the same and pony up the money for the escrow deposit and interim interest. But remember, this comes back to you because you will receive your old escrow balance back from the old lender after settlement and your July mortgage payment is now paid.
I tell folks that it’s not a big deal either way. The big deal is lowering your interest rate and not having to pay one dime to do it!
If you would prefer not to escrow and pay your tax and insurance bills yourself, most of our products allow this “escrow waiver” free of charge!
Are there restrictions?
Of course. Everything has restrictions. There are loan amount limits, credit score limits and loan-to-value restrictions, among other things. But most folks qualify and it’s up to a PMC professional to let you know if you can save some money. If we think you can, we’ll send you a loan summary. If not, we’ll tell you right over the phone. But it’s worth a call. Have the basic information about your loan ready.
For more detailed information on the zero cost refinance program, please click here for a link to one of PMC President Henry Savage’s published columns.