By Brent Sullivan
As a smart investor, you should know the concept behind a No Cost Refinance. Although this concept currently applies to owner occupied homes only, it will help you understand how our industry operates.
Here is an actual example: Mr. Jones came to me eight years ago and wanted to lower the rate on his mortgage without paying any costs. I explained to Mr. Jones how No Cost Refinances really work and he understood the concept. I refinanced his mortgage saving him $150/month. This transaction did not cost Mr. Jones one dime because I paid all the closing costs. Since then, I have refinanced Mr. Jones’ mortgage four more times lowering his interest rate each time. Mr. Jones has never paid closing costs for any of these transactions. I paid all of the closing costs each time.
How do I pay all of the closing costs? I pay all the costs from the lender’s rebate (sometimes called yield spread premium or back side pricing). There is enough money from the lender’s rebate to pay all of the borrower’s closing costs and still earn some money.
The downside to a No Cost Refinance is the fact that the borrower will be paying an interest rate that is slightly above market. Up to a certain point, the higher the interest rate, the more rebate I receive from the lender. That is how I am able to receive enough money in lender rebate to pay all of the borrower’s closing costs.
Here is the key: this slightly higher interest rate usually costs the borrower less over time than the total of all the closing costs the borrower will pay while living in that home.
And, here is the kicker: Mr. Jones actually understood that once he completed a No Cost Refinance, he will NEVER have to pay closing costs again for as long as he owns that piece of property.
For Mr. Jones, it is like having a permanent interest rate “float down” privilege attached to your property. When interest rates take a dip, I know to expect a call from Mr. Jones as well as the other borrowers who have learned this concept from me. If I do not hear from some of my No Cost Refinance borrowers, I call them. There is nothing more gratifying than to contact one of my No Cost Refinance borrowers and announce that I can, again, lower their interest rate at no cost to them.
One caveat; beware of the “No Cash” refinance versus a “No Cost” refinance. While the names sound very similar, these loans are actually very different. With a “No Cash” refinance, the closing costs are rolled into the balance of the new loan. With a “No Cost” Refinance, as mentioned above, all closing costs are paid and nothing is rolled into the new loan amount.
We have an old saying in our industry that sums up the concept behind the owner-occupied No Cost Refinance. It is: “The best interest rate is the free interest rate”.
Be an Investor – Not a Landlord!