Thursday, March 27, 2008

Mortgage loans: Are 'No Cost Loans' Really at No Cost?

Buyers are often tempted to leap into refinancing their home loan in order to salvage a one-half (or quarter) percent on their existent mortgage. Unfortunately, those "no cost" loans are rarely "no cost". Here are a few tips to assist do certain your home loan is a true no cost loan.

Verify how the lender gets

Nine modern times out of ten, a no cost loan is structured so that a $200,000 loan is refinanced, and the lender gets their wage by
inflating the loan. After your "no-cost" refinance, it may seem
nice because your payment is $40 or $50 a calendar month cheaper, however,
instead of lone having 25 old age before your loan is paid off, you now
are going to take 30 old age to pay it off because of the
refinance. Not only have got you "reset" your amortisation schedule,
but you now owe $203,000 on the loan you only owed $200,000 on anterior to the refinance. Although your monthly payment is lower, and you didn't pay any money out of pocket (yet) for the loan, it isn't really a no cost loan. When you travel to sell your home you'll now owe $3000 more than than you would have got had you not refinanced.

Make certain your loan officer gets paid via the output spread.

In order to make certain your loan officer gets paid via the
output spreading vs. out of your pocket, or by inflating the mortgage loan, inquire your loan officer the following question: "If we travel through with this refinance, can you delight do certain that my loan's principal balance isn't a penny more than what it is now, and also do certain that I don't pay a penny out of my pocket?"

By asking that exact question, you will coerce your loan officer to do certain they get paid by inflating your interest rate high adequate that they get paid via "yield spread" from the loan establishment who finances the loan. If they can't get you such as a loan, it is NOT worth refinancing your loan. (For example, if you refinanced a $200,000 loan, you have got 3 choices:

(1) Wage about $2000 out of pocket as an "origination fee" to your loan officer and get a 5.5% interest rate.

(2) Wage nil out of pocket, but get a new loan at $202,000 -
$2000 of which will travel toward paying your loan officer's inception fee. (This volition also get a 5.5% interest rate)

(3) Refinance your loan at $200,000, wage nil out of pocket,
but take a 5.875% Oregon 6% interest rate. Yes, you'll have got a higher interest rate, but this is the lone true "no cost" option. If the interest rate you are given is not better than your existent loan rate, you should NOT refinance your loan.

In a nutshell, option 3 is the lone option where your loan officer gets paid without it costing you money out of pocket. If there is a opportunity you will sell your home within the adjacent couple or few years, you should never refinance with any other option than #3. If you believe you will have got the home longer than 3 years, options 1 or 2 mightiness be deserving your while.

To happen a real estate agent who can assist you place the most competent and ethical lenders -- who also have the most competitory rates, visit


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