An agent recently told us he only refers his clients to “one loan officer” because that loan officer “offers a ‘free’ refi to all of his clients in 6 months, if rates fall.”
We tried to explain to the agent that there is no such thing as a free refi, and that every lender in the world offers the same deal (because we make money when we refinance someone), but the agent wouldn’t have it.
So, I thought I’d blog about this again.
Every refi comes with about $2,000 to $4,500 (depending on loan amount) of “non-recurring closing costs” or one-time fees, such as an appraisal, title insurance, escrow fees, notary fees, and underwriting fees.
Those refi fees can be covered in three ways:
- “Out Of Pocket” – where the borrower writes a check to cover them with funds from his bank account;
- From Loan Proceeds – where the loan amount is increased by enough to cover closing costs; or
- With A Lender Credit – where the lender covers the closing cost with an actual credit.
The third option (lender credit) is the most common and it is what we recommend for reasons I set out below.
BUT – there is no such thing as a free lunch! Lender credits almost always come with higher rates.
This is because lenders get more “yield premium” when they sell a loan with a higher rate, and they need that extra yield premium to pay for the credit they are giving for closing costs.
As a reminder, most mortgage lenders make money by selling the loans they fund on the secondary market (to various “investors”) for “premiums.”
For example, if a lender is able to sell a $500,000 loan at 5.5% for $510,000 on the secondary market, it might be able to sell a $500,000 loan at 6.0% for $515,000 (or for 1% or $5,000 more because the rate is 1/2% higher).
When lenders offer “no cost” or “free” refis, they are usually just offering a lender credit for closing costs that comes with a slightly higher rate (usually about 1/4% higher, but it depends – based mostly on loan amount).
Some shady lenders also offer “no cost” refis when they really mean “no out of pocket costs” – simply because they are bumping the loan amount to cover closing costs and not offering a credit at all.
We usually recommend “no cost”/lender credit refis because most borrowers don’t want to part with personal funds; don’t want to increase their loan amount; and/or don’t expect to keep their loan long enough to offset the higher costs they’d have to pay to get a lower rate.
So, once again, borrowers simply need to beware. And – borrowers most definitely should not use a lender for their purchase mortgage simply because it offers “free” refis if rates fall, because – what sane lender doesn’t?
Rates Rose Again and Have Been Rising for All of August
Rates rose again today, and they have now risen a 1/2% or more over the month of August. This is primarily in response to continued inflation concerns and the likelihood of a large increase in the Fed Funds Rate in September.
This is all somewhat ironic though, as many prices are notably falling (gas, commodities, and many food products), and rates often fall when the Fed increases the Fed Funds Rate because investors perceive the increases as “inflation fighting.”
Founder | JVM Lending
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