Refinancing is an excellent way for homeowners to benefit from low interest rates or an increase in equity – or both, saving themselves a lot of money and/or garnering a substantial quantity of cash.
There are two options borrowers have when refinancing with JVM Lending to avoid or mitigate closing costs: a “No Cost Refinance” and a “No Money Out of Pocket” loan.
What Is A No Cost Refinance?
When a lender offers a No Cost Refinance, they are usually saying that they will cover all of your “non-recurring closing costs” or one-time fees. These fees include title insurance, escrow, appraisal, underwriting, and loan processing fees, among other things. This does not mean that borrowers will not need to bring in any cash to close. Simply put, a no cost refinance usually means that the lender will cover all the one-time fees that occur during a refinance transaction. Borrowers will typically remain responsible for all “prepaid items,” or “recurring closing costs” like mortgage interest, property taxes, and hazard insurance.
Lenders usually cover closing costs for borrowers by providing a “lender credit.” Lenders are able to offer lender credits by offering a slightly higher interest rate that garners them more “yield premium” or “a commission” of sorts that they receive when they sell a mortgage on what is called the secondary mortgage market. Lenders use that extra “yield premium” to pay for the non-recurring closing costs.
A No Cost Refinance, however, should NOT be confused with “No Cash Out of Pocket Refinance.”
What Is A No Money Out of Pocket Refinance?
No Money Out of Pocket Refinances are very different from No Cost Refinances. The critical difference between the two is that lenders do not cover any closing costs for No Money Out of Pocket Refinances.
As the name implies, a “no money out of pocket refinance” allows borrowers to close their refinances without having to bring in any cash. Instead of providing a lender credit to cover closings, lenders increase the principal balance of the loan by an amount sufficient to cover all of the closing costs. Lenders can increase the loan by enough to cover all of the non-recurring closing costs as well as the recurring closing costs if borrowers so desire.
Borrowers should be aware, though, that this could increase their principal balance by as much as $3,500 to $20,000, depending on the loan amount and the amount of prepaid costs—particularly if property taxes are due or if a new “impound or escrow account” is established.
Borrowers should also be aware that many lenders play marketing tricks by offering “no money out of pocket refinances” while implying that they are “no cost” refinances. That is why this distinction is so important.
Questions About Refinancing? We Can Help
If you are interested or considering a No Cost Refinance or a No Money Out of Pocket Refinance, our team is available to help! All of us at JVM Lending are exceptionally knowledgeable when it comes to all types of refinances and the many loan programs available. Our Client Advisors are available 7 days a week for any questions by phone at (855) 855-4491 or by email at [email protected].
