NO COST DOES NOT MEAN NO “CASH TO CLOSE”
Almost all of our refinances are “no cost” loans, meaning that we, as a lender, cover all of the “non-recurring closing costs” (title, escrow, appraisal, underwriting, etc.) with our commission or rebate.
Borrowers often get confused though b/c they interpret “no cost” as “no cash to close.”
But borrowers do need to bring in cash to close their transactions to cover “pre-paid” interest, property taxes and/or hazard insurance – if they are owed (and interest is almost always owed).
Borrowers can avoid bringing in “cash to close” if they increase their loan amount by enough to cover the prepaid items. Lenders can also cover prepaid items but they would have to further increase the interest rate to ensure there is enough extra commission to cover the prepaid items.
MORTGAGE INTEREST PAID IN ARREARS
Interest on mortgages always accrues in arrears. This means a September 1st mortgage payment covers interest that accrued in August.
In contrast, car loans require interest in advance, meaning a September 1st car payment will cover interest that WILL accrue in September.
PURCHASES
For a purchase, borrowers pay interest through the end of the month, and then effectively “skip” a payment b/c no payment will be due until the two months after close.
Hence, if a purchase is closing August 19th, the borrower will pay interest at close (in escrow) through August 31st.
She will have NO September mortgage payment b/c there will be no interest in arrears (it was pre-paid at close). The first payment will be due on October 1st.
REFI’S
For refi’s, borrowers pay interest on the old loan through the date of close, and on the new loan through the end of the month (and then they too effectively “skip” a payment).
Hence, if a refi is closing on August 19th, borrowers will pay interest on the loan they are paying off from August 1st – August 19th, IF they made their July payment.
If they have not made their July payment, they will pay interest on the old loan from July 1st – August 19th. And, as mentioned above, borrowers will pay interest on the new loan from August 19th – August 31st.
In any case, “skipping a payment” is somewhat misleading b/c borrowers are really just PREPAYING their interest, property taxes and insurance.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167
