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Want These Low Rates but Afraid to Refinance?

Closing costs…certainly one of the least attractive components of Refinancing a home mortgage. In many cases, closing costs can be as great as 3% or more of the loan amount. When you combine underwriting fees, title fees, appraisal costs and origination fees, the total can be a significant amount. In most cases, there are options that will greatly reduce the amount of fees that a borrower pays, even to as little as nothing.

Many homeowners have Refinanced multiple times since interest rates began their initial decent in November of 2008. Unfortunately, far too many of these borrowers were charged thousands of dollars each time they refinanced. As a result, their mortgage balances are now much higher than they were before the initial refinance. Although they now have lower interest rates, one can argue whether or not they are better off having added to their principal balances. In the current age of falling home values, it is more important now than ever that mortgage balances move lower not higher.

The solution to avoid having a mortgage balance continually increase, while still taking advantage of falling interest rates, is by managing the mortgage with no-fee loans. By definition, a no-fee loan is one where in exchange for a slightly higher interest rate a borrower can have all the closing costs that are legitimately incurred in doing amortgage paid for them through the higher rate. Because there are loan size and credit score requirements, and the home must be owner occupied, a total no-fee loan may not be possible in some cases. However, a lower fee loan is always available and should be the second alternative to a true no-fee loan.

A Case Study

Let’s assume that a homeowner has a $250,000 mortgage with an interest rate of 4.75%. If the current market rate is 3.875% with $5,000 in closing costs, a no-fee loan will be in the ballpark of 4.25%. I have adjusted the loan amounts to compare apples for apples. In other words, if there is a difference in loan costs between the two options of $5,000, the no-fee option will have a loan amount that is $5,000 lower. That will most effectively show the true cost of paying closing costs to obtain a lower interest rate. Therefore, we would compare a balance of $255,000 at a rate of 3.875 vs. a loan amount of $250,000 at a rate of 4.25%. The results are as follows:

  • Full-Fee Option: $255,000 @ 3.875% has a P&I payment of $1,199.10
  • No-Fee Option: $250,000 @ 4.25% has a P&I payment of $1,229.85

You will see that by paying $5,000 in closing costs, the monthly payment will be $30.75 lower than the no-fee option. Therefore, the breakeven point is 162 months. If the loan will be in place for at least 13.5 years, then paying the fees for the lower rate may be the best option. However, that is very rare and does not account for the option to move the rate lower again should interest rates continue to fall without losing the amount paid for the loan.

Even if you have Refinanced your mortgage in the most recent three years and would love to take advantage of the low interest rates available, a no-fee loan may be just what you need. Contact me at 801-501-7950 or e-mail me at for a free mortgage review.

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