Today I will provide some background on how exactly no cost loans work. There are a lot of potential clients of ours that are completely skeptical and are convinced that there’s some sort of sleight of hand involved, but I assure you, it’s a great way to lower your rate with minimal to no out of pocket expenses. This type of loan scenario was much more popular and possible about a year or two ago; ever since the market slowdown, wholesale pricing has tightened quite a bit and we’re not really able to offer this for too many situations anymore. With that said, let’s begin.
You’ll most often be offered this closing scenario by brokers and that’s the perspective I’ll be explaining things from. We start with the wholesale lender; these are large banks like BB&T or Suntrust that not only sell their mortgages in their own branches, but have wholesale divisions that offer products to third-party sales professionals -ie. brokers. There are also wholesalers like Fidelity and Myers Park who don’t have any focus on retail banking and therefore don’t have any walk-in banking locations. Wholesalers offer a variety of loan products that brokers can sell; the product eligibility guidelines and requirements may differ for retail sales opposed to wholesale sales (you may have problems qualifying in the bank but not with the broker, and vice versa – weird I know, but often true).
So here’s where the explanation of the no cost loan begins. A typical loan costs anywhere from $3k to $4k to close, these are the closing costs (origination fees, attorney fees, etc). The broker in no way is going to walk away from the transaction with $3k, don’t get me wrong. There’s a processing fee, a title insurance fee, a credit report fee, an appraisal fee, an attorney fee, a recording fee, yada “>yada “>yada “>yada yada yada. Moving on. Let’s get another thing straight before we continue – mortgage folks talk about everything in points, or percentage points || 1 point = 1% ||. Now let’s create an example so we can walk through the pricing process. How about an example for a refinance where the loan amount is $250k and it’s going to cost $3k to close. The $3k translates to 1.4 points or 1.4% of the loan amount, are you with me? (250,000 x 1.4% = $3500). So it’s going to take 1.4% of the loan amount to cover the closing costs.
Now, wholesalers offer premiums to their brokers to sell their loans. (small disclaimer – this is semi-realistic example – I chose these numbers to make our example make sense) In our example, let’s say that the wholesaler is offering a .75% premium (known officially as the Yield Spread Premium) on a 30yr fixed rate loan at a 5% rate. So any broker that sells this 30yr fixed rate, on top of their other charges, will make .75% of the loan amount. In our example, .75% of the loan amount is $1875. If the broker is trying to price out a no-cost loan, they’re going to consider that amount ($1875) and adjust the rate upward until they’ve moved it enough to cover the rest of the $3k they need. In this case, bringing the rate up .5% will create another $1250 in yield spread premiums. So with this loan amount, a .5% increase in the rate has covered the costs to close the loan. The rate increase creates a difference in payments of only $77/month. ($250k @ 5% = $1342/mo – $250k @ 5.5% = $1419/mo)
So why does this make sense?
1. Do you know exactly how long you’re going to be in your home? No? If you decide you want a lower rate and you want to either pay for it out-of-pocket or roll those costs back into your loan amount, you’re going to be waiting a little while until you start to realize the savings from the rate drop. It may be as little as 8 months or as long as five years, either way – you’re waiting for those savings.
2. Do you have the cash on hand? Not everyone has $3k for a non-emergency situation. The no-cost option provides a great way to lower your monthly payment without having to bring a ton of money to the closing table. ALSO – another way to handle the closing cost issue would be to roll them back into the loan – a very common practice to curb the overall out-of-pocket cost of a refinance. Unfortunately, not everyone has enough equity to do that and in these cases, a no-cost option is the way to go.
There will always be those people who say “So there are costs! I knew it; I do have to pay closing costs! This isn’t no-cost at all! The costs are just built into the rate – what a scam!” To these people I say the same thing.
“You want to refinance into a lower rate. This is a service that we provide. One of your options is to have a lower rate than you have now for $0 and see monthly savings instantly. This isn’t the lowest rate available, but we’ll provide this service for you for $0. Now if you could, explain to me what cost is being incurred by you in this situation?”
A tad bit frank? Yes, but it really makes you think about the transaction with regards to cost and benefit. Plus people get quite bent out of shape thinking that it’s a scam. Trust me, our clients are some of the brightest and successful people in the Triangle – some have been with us for over 10 years. You don’t get this far and acquire the talent that we have by being anything but a customer oriented firm that is serious about quality and top notch service.
For More Information Call:
1350 Sunday Drive
Raleigh, NC 27607