How to Refinance a House for Free
Savvy mortgage professionals have been offering no closing cost refinances for years. It isn’t marketed heavily because the interest rates involved are not the lowest one could seek out. So to allocate a big part of a marketing budget to spread the word that your rates are higher than everyone else’s isn’t an attractive idea. So while no cost refinances exist, it’s a pretty well kept secret.
It’s important to understand that the refinance isn’t really free. There are lender fees, appraisal fees, title fees and closing agent fees incurred just like any other mortgage transaction. The difference is all of these costs are being paid by the originator while the borrower pays nothing. The originator can be a lender or broker, either can offer this type of loan transaction.
In order for a free refinance to work, the borrower needs to meet some basic criteria. First the borrower should have a good credit score. At least good enough to meet fannie mae’s or freddie mac’s guidelines. A credit score in the mid six
hundreds usually does the trick.
The borrower will usually have to be able to document employment and income although, in the past, no cost refinances could be done on a stated income (income is stated on the application but not verified) or no ratio basis (income is not disclosed at all on the applicaiton). Additionally, the size of the refinanced loan has to be large enough to cover the fixed and variable costs paid by the originator.
The biggest consideration in any refinance is the length of time it takes to recover the closing costs. 
This is a non issue with the no closing cost refinance. If you lower your rate by just a quarter percent and it cost you nothing to do so, you don’t have a break even point. The benefits of the transaction are immediate. This aspect of the free refinance makes it both unique and a no brainer.
Who Benefits From The No Closing Costs Refinance?
- All homeowners with rates .25% above the current market rate
- All homeowners with adjustable rate mortgages that want the security of a fixed rate.
- All homeowners with second mortgages.
- All homeowners with a fixed term mortgage that would like to switch to a different term.
(ie. 30 year to 15 year etc.)
How To Be Sure It’s a No Closing Cost Refinance Mortgage
It’s important to know the difference between a no closing cost refinance mortgage and a no points refinance mortgage. With a no points mortgage, you will still pay all of the other closing costs associated with the refinance. With a no points loan, the only costs waived are the points (origination or discount) or the origination fee. With a no closing costs refinance, none of these fees are paid by the borrower.
One way to tell if your mortgage company is providing you with a true no closing costs loan is to examine the Good Faith Estimate and the Truth in Lending disclosures. These disclosures are required to be sent to you within three business days of the mortgage company receiving your application.
If you are truly getting a no closing costs refinance, your Truth In Lending disclosure will have an APR (Annual Percentage Rate) that is the same as the interest rate being offered. When APR and Interest Rate are the same, that reflects there are no up front costs in obtaining the loan.
The Good Faith Estimate will list the usual closing costs but all of them will be paid by the originator and designated as such. There should be absolutely no costs payable by the borrower.
Another tip is to look at the loan amount on the disclosure forms. The loan amount should be within a thousand dollars or so of the original loan amount being refinanced. Having a big difference between existing loan balance and the new loan amount should raise a red flag. If additional cash wasn’t requested by the borrower, the amount over the existing loan amount may represent fees not disclosed by the lender.
Other Considerations
There are items that mortgage companies never cover in the no closing cost refinance. Generally speaking they are pre-paid items and the initial appraisal cost.
Pre-paid items are not closing costs per se. They are an outlay of items that need to be paid in order to complete the refinance transaction. Typically pre-paid items not covered by the mortgage company are “odd days interest” and escrows for taxes and insurance.
If the borrower cannot front the monies needed for these items, the new loan amount can be increased to cover the layout. If a loan being paid off currently has an escrow account, the unused monies will be reimbursed to the home owner usually within three weeks or those monies are applied to the final payoff. The most common method is a reimbursement after three weeks.
So even though some cash has to be laid out up front by the borrower, these monies are recouped after the old loan is paid off.
In order to protect the mortgage company from ordering and paying for needless appraisals, many mortgage companies will require the borrower to pay for the appraisal up front. If the borrower doesn’t complete the transaction, the appraisal fee becomes the responsibility of the applicant. When the loan closes however, the mortgage company reimburses the borrower.
How The Originating Mortgage Company Gets Paid
This brings up the subject of Yield Spread Premium or Premium (for lenders). A premium is paid to either a mortgage broker or lender for delivering a mortgage to the secondary market that is above the par rate. The par rate is the interest rate that costs an originator nothing and pays an originator nothing.
By delivering a rate higher than par, the mortgage originator is covering the borrowers costs for the transaction and anything left over represents the originator’s profit on the transaction. This is why no closing costs refinances always have rates higher than traditionally priced mortgages.
As long as the rate being delivered is lower than the borrower’s current rate, who cares? The rate reduction, no matter how small or large, was provided free, without any costs what so ever.
The free refinance mortgage can be done over and over again as the interest rate environment allows. It is a no cost way to lower housing and interest costs without risk. The no closing costs refinance should be in every frugal home owners arsenal of money saving techniques.