Nobody, and I mean nobody, expected rates to fall this much in 2017.
When rates do fall, we reach out to all of our eligible borrowers and offer the option to refinance – usually at “no cost” (where JVM pays for all non-recurring closing costs). Borrowers sometimes wonder how we get paid when we offer “no cost” refi’s.
How “No Cost” Refinances Work
We do no cost refinances by locking borrowers in at a rate that is about 1/4 percent higher than the rate would be for a “No Points” loan that would require the borrower to pay closing costs of about $2,500 to $4,000 (depending on loan amount).
By locking in a slightly higher rate for a “no cost” refi, JVM earns a larger commission that we then use to both pay ourselves and the closing costs.
Sometimes borrowers want the lowest possible rate no matter what and therefore opt to pay their non-recurring closing costs. By opting for the lower rate and paying for closing costs, borrowers might reduce their payment by $40 to $50 per month. But, it usually takes over 4 years to make up the closing costs with savings from the lower payment. And, the rule of thumb is to not incur costs if the resulting savings do not cover the costs in less than 4 years.
The ‘big banks” often offer the “no points” option (with closing costs) to borrowers b/c it makes their rate quotes appear more competitive. Banks also sometimes further confuse borrowers by only highlighting their own fees in their quotes and not illuminating necessary 3rd party fees like title, escrow, appraisal, notary, etc.
We like “no cost” refi’s, in most cases, b/c they are simpler and cleaner and usually better for the borrower. This is b/c borrowers often keep their loans for shorter periods than they expect b/c of life events – remodels, tuition, job transfers, moves, divorces, etc. It is also b/c rates often fall unexpectedly like what has happened in recent weeks.
There are probably a lot of borrowers who paid closing costs in January who now regret doing so.
Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646