Refinance Without Closing Costs

refinance With the housing market on the slow path to recovery, many brokers continue to offer low-cost refinances -- a mortgage payment revamping that covers closing costs -- to sweeten the deal for homeowners.

According to mortgage broker Kirk Tatom of Dallas-based Tatom Lending, a low-cost refinance also referred to as a zero-closing mortgage rate, is essentially a way to finance closing costs. For homeowners who plan to stay in their home, this is advantageous with one overarching caveat: it's beneficial as long as it lowers monthly mortgage payments and there's no change in the loan's balance, maturity date (the final payment date of the loan) or on the terms of the loan.

For those pursuing a low-cost refinance, here's what you need to know and a few tips on how to negotiate the best deal:

1. Pool a group of mortgage lenders for their rates. Akin to buying a car or a home, refinancing a loan necessitates "shopping around" to get a bargain. Through referrals, seek out a handful of reputable mortgage brokers (or contact your current mortgage provider) and request their rates. Tatom suggests asking them specifically for three rates: the lowest possible rate plus origination fees (what is charged by the broker or lender to service the loan); a mortgage rate with no points (a "point" is one percent of the total mortgage and typically used to finance broker's fees); and a mortgage rate that would cover closing costs.

2. Start with the broker with the lowest offered rates. Usually, the broker provides two rates including an interest rate and a APR, an annual percentage rate. The APR is a standardized rate
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that helps consumers compare the cost of loans. If the spread is low between the interest rate and the APR, this means the interest rate has not been inflated with fees, like origination, processing and couriering fees, says Tatom.

3. Negotiate the chosen interest rate. It's possible to bargain with your mortgage broker on rates and fees, especially if she or he has broken out the origination fee, which is similar to a commission. But remember, an origination fee -- typically 1 percent of the loan -- is also a part of the cost.

4. Review the good faith estimate (GFE). After you've selected a interest rate, the servicer of the loan, whether it's a bank or a mortgage broker, is required by law to provide a good faith estimate to the borrower within 3 days of applying for the loan. The three-page document details the fees and costs of the loan. While some of the fees -- insurance, appraisal and title fees are standard, Tatom recommends taking a closer look at the "adjusted origination fees" that are on the second top page of the document. In this section, the broker should spell out the extra fees, including origination fees or other miscellaneous fees accessed by the mortgage firm. If not, borrowers can request to see an itemized list of fees.

5. Beware of the yield spread premium, a bigger commission charged by brokers to offer higher interest rates in exchange for lower upfront costs. It is usually clumped together with origination fees in the form of a rebate and by law, mortgage brokers are required to pay this money back to the borrower at a later point. (Banks, on the other hand, have a fee called service release premium which is not legally required to be returned to the borrower).

But a low-cost refinance covering your closing costs or a large percentage of closing costs is also likely to result in a higher interest rate. Even though current mortgage payments would drop, homeowners eying a zero-closing cost mortgage need to be aware that an elevated interest rate could increase total interest expenses over the course of the loan. In other words, this means a homeowner may pay more in total interest costs after the refinance than before.

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