How to Refinance a Mortgage With No Closing Costs
People often look to refinance their mortgages when interest rates are falling to save money. There are fees associated with the new loan, but a no-cost loan can save up-front costs because the lender either waives those fees or rolls them into the new loan. Mortgage companies receive compensation from the borrower, the lender, or both. When a borrower asks for a no-closing-cost loan, the interest rate charged is higher than the prevailing rate, and more income is generated from the lender. This is called yield spread premium, or YSP. The excess income is used to pay the closing costs resulting in no or very low up-front expenses for the borrower.
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Instructions
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Obtain referrals for mortgage originators from friends, family and people you trust. If you are unable to obtain a referral this way, contact your local banks as most will offer mortgage services. To obtain a preferred range of quotes, contact three to five originators. Call these originators and request quotes for a no-closing-cost mortgage.
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Compare the quotes. Since these quotes should have no closing costs, the term or length of loan and the interest rates are the only options to compare. Some companies may ask that you pay escrow fees when you close on the new loan. These fees, which are generally paid monthly into an account, cover your insurance and property tax. The lender maintains this account for you, and when those bills are due, it pays them out of it. Consider this option, as your current lender will refund the balance of the escrow account it has with you once that loan is paid off.
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Choose an originator, and make an appointment to apply for the loan. Ask for a list of items to bring with you. Typically the originator will request you bring documentation of your income and assets. Since most lenders require homeowners insurance on the property, provide your originator with your agent's name and telephone number. Once you apply, the originator will pull your credit report, and submit your file to the lender for approval. This process can take some time so patience is important. At some point an appraiser will contact you to appraise the home. Once the lender approves all of the documentation you will be ready to close on the new loan.
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Tips & Warnings
Do not authorize the originators access to your credit report before you choose one and actually apply for the loan. Every time your credit report is pulled it can lower your credit score. Even 10 or 20 points less could raise your interest rate, or even disqualify you from the loan. Be sure you accurately tell the originator what your credit profile is like. If you do not disclose something like a 30-day late payment on your current mortgage from two years ago, the quote may not be accurate.
References
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