The greatest truth I can possibly state here is something already suspect:
There is no free lunch.
Burn that into your mental capacity. No one can work for nada. You can't afford to go to work and not get paid. Neither can a loan officer, mortgage company or bank possibly yield to arrange a mortgage loan for absolutely nothing. The loan officer can't feed their children and the mortgage company or banks can't stay in business. If you can believe that mortgage companies do loans for no profit merely about as practically as you can believe car dealers sell their cars “at or below factory invoice.”
Sure if the loan officer and the company were willing to do the loan at a true”no cost”, there are other “hard costs” active in the loan. Items like: lender fees, attorneys fees, title search, intangible taxes, recording fee; precisely to name a few, must be paid by someone.
So how can a Mortgage company offer a No Cost Mortgage Refinancing? Virtually the only way this can be done is through a concept called”Above Par Pricing.” Most individuals have heard of paying” discount points” to buy a rate down. That is, someone (in the old days it was usually a home builder), would pay a discount (a “point” is 1% of the loan amount) to the lender so the buyer/borrower would give a lower rate.
You see, mortgages are priced merely like bonds. There is a”Par” price and then there is a discount price and an above par price. So, instead of somebody paying discount points to buy a rate down, if a mortgage company offers a loan where the rate is above par, the mortgage company obtains a premium. This is usually called a “Yiled Spread Premium.” In a 'No Cost Mortgage Loan', the mortgage company uses the Yield Spread Premium to cover all the costs of the loan and the mortgage companies turn a profit as well. So, does this mean the mortgage company is betraying or ripping- off the consumer? No, not at all, It all boils down to options.
For instance, on a purchase the borrower has three options: 1. Pay the closing cost out-of- pocket 2. Negotiate for the seller to pay the closing cost. 3. Pay a slightly higher interest rate on the loan and have lower cash out of pocket. On a refinanced the borrower has three options as well: 1. Pay the closing cost out of pocket; 2. “Roll” the closing cost into the loan. This simply means that the costs are added to the loan so the costs are being financed into the loan amount. This reduces the borrower's equity. 3. Pay slightly higher interest rate on loan and have no cash out of pocket and not invade their equity.
Any of these alternatives can be good or bad depending upon the individual borrower’s situation. That's why a competent mortgage broker will ask lots of questions before proposing a mortgage loan program and providing an interest rate.
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