“Come on, there’s no such thing as ‘free’ in this world,” you’re saying to yourself. “How can a lender do a loan with no-cost loan?”
Yes, there are always fees associated with doing a mortgage. A lot of individuals contribute to making a mortgage transaction happen. The lender has an underwriter, a closer, a funder and various support staff. The title company will issue a title insurance policy, making sure there are no problems, or “encumbrances” on the property. They also have someone who does a title search to make sure the title is clear, as well as an escrow agent who will close the loan and handle the transfer of money, along with other support staff. Don’t forget the appraiser who will appraise the property. These people all contribute to getting the loan done and expect to be paid for their work—just like we all do.
So who pays those costs? You will, if you choose a market rate. The lender will pay them if you choose a rate that is above the market rate on the day you lock your rate—usually a quarter percent higher than the market rate. All 20 of the wholesale lenders The 801-APPROVE Team works with offer no-fee loan options. It’s entirely up to you: Pay the closing costs by adding them to your loan balance, or paying them out-of-pocket at the loan closing; and get the lower interest rate. Or choose a slightly higher interest rate and have the lender pay your closing costs.
When you choose the higher rate, the lender will give you a “rebate”. The rebate is a fixed percentage of the loan balance. Interest rates and their corresponding rebates change daily. But the rebate being offered by a lender on the day this article was written, was 1.65% of the loan amount for a rate that was ¼% above the market rate. That means you would get $3,300 in rebate from the lender on a $200,000 loan ($200,000 x .0165).
That rebate more than covers the roughly $2,300 in closing costs associated with a $200,000 loan. So you would have about $1,000 in lender rebate left over after covering all of the closing costs. The remaining $1,000 would then be applied to your prepaid items: interest on the loan for the rest of the month in which you close, and for the money necessary to establish your escrow account the lender will use to pay your property taxes when they’re due in November as well as your home owner’s insurance premium when it is due. If there is any amount left over after applying it to your prepaid items, they would apply the remainder to your loan balance, reducing your principal.
If your mortgage balance is only $50,000 then it is almost impossible to get enough lender rebate to cover all of the costs. As 1.65% of $50,000, is only $825 in rebate—which is not enough to cover the fixed costs of refinancing. A mortgage loan of $400,000 would yield a lot of rebate, $6,600 in this example. That amount would cover all of the costs, as well as the prepaid items, and leave some money that would be used to reduce the principal balance of $400,000. So as you can see, the larger your loan balance, the easier it is to do a no-cost loan—as the rebates are a fixed percentage of the loan amount.
That’s how a “no-cost” mortgage works. The lender pays you a rebate because they have a mortgage that will yield them a slightly higher return over the life of the loan. In return they give you a rebate, upfront, to cover the closing costs.
Still have questions? Want to see what a no-cost loan will do for you? Call The 801-APPROVE Team and we’ll be happy to run the numbers for you.