The theory behind a no-cost mortgage is great. It puts all the fees on the lender, who is better at negotiating them than you anyway, so all you theoretically have to do is personal loans Mississippi shop based on the rate. In typical mortgage shopping, the lenders play a constant game of moving pieces. If you shop by rate, they nail you with points. If you only shop zero points to eliminate that, they’ll start varying their fees. You can minimize the lender’s advantage by doing a no-cost refinance, but there are a few places here where the new lender can still take advantage of you.
First, make sure you know what happens with the old escrow account. If the lender makes you pay it to them (“because we paid for your new escrow account”) that isn’t as good a deal for you as if you get your old escrows back. How bad of a deal depends on how much you had in there. I seem to remember falling for this trick with one of my refinances.
Sometimes, it might be better to have the lender pay everything, then you can take your old escrow account and apply it to the principal
Another place you can get burned is with the new escrows. Some no-cost refinances will fund your new escrow account AND let you keep the old one. However, you might not get as good a rate. For example, with my last refinance I was offered two options. They would pay for my new escrow account (and interest which we’ll get to next) for a 3.5% refinance, but not for 3.375%. They wanted me to cover those expenses for 3.375%. I figured since I would be paying those expenses myself if I didn’t refinance (remember nobody else will pay your interest, taxes, or insurance), I might as well take the lower rate.
Watch the interest too. That works out great if you refinance the first week of the month, but isn’t worth much if you close the last week. If they’re paying, try to negotiate a closing early in the month!
Another place a lender tried to burn me in the past was changing my loan from one without a pre-payment penalty to one with a pre-payment penalty. The only difference is a little tiny checked box. If you don’t read the paperwork carefully at the closing, remember that by law you have 3 days to cancel the refinance if you find out someone has pulled a stunt like that on you.
That was all credited back to me at closing, but if I hadn’t closed the loan I would have had to eat those costs
Finally, be aware of costs paid outside of closing. For example, I had to pay for the new appraisal, an origination/lender fee, and a credit report charge. If you’re concerned the loan won’t close for some reason (sketchy credit, etc.), try to get your lender to pay these expenses. The appraisal is usually the most expensive part ($300-500 is common), so try to delay that at least until you’ve been approved.
So that “no-cost refinance” covered all the fees, but didn’t cover any of the interest or escrows. Yours may be different. But when shopping around, you need to understand who is going to cover the fees, the interest, and the escrows. You also need to be clear that you don’t want any of those expenses added on to the loan total. This might give you better bang for your buck than bringing cash to the closing and getting a little lower rate. It was close to a wash in my case, so we decided to go with the lower rate to save the hassle factor of another refinance in a few months or years. But if rates had dropped further and we refinanced again soon after, we might have been better off taking the 3.5% and having the lender pay