Assuming you have a credit score of 720+ and meet the other basic requirements to refinance, how do you refinance your conventional fixed-rate mortgage without paying any closing costs from your pocket while staying under the nation’s average interest rate? Well, it might sound impractical so we are going to tell you exactly how we refinanced without closing costs, with proof!
In general, to qualify for a conventional loan, you need a score of 640+. But a 720+ score gives you an upper hand to get the best possible interest rate since you will be considered as an excellent borrower. If your Loan to Value ratio is above 80%, then you will also have to pay the monthly PMI (private mortgage insurance). And to get the best PMI, you will need a score of 760+.
In our previous article, we explored the different sections of a conventional refinance loan estimate in detail. For this article, we are going to use a well-negotiated refinance loan estimate that was closed in April 2020. The borrower in this case is a member of our Finance Guider team with a credit score of 760.
As you can see, the interest rate the borrower received was 3.25%. To confirm this was below the nation’s average rate at that time, here is a screenshot that shows an average interest rate of 3.29% on March 5th 2020:
Let us breakdown the second page of this well-negotiated loan estimate to calculate the actual closing costs:
As you can see, the Origination costs in section A were the ideal ZERO. In some cases, an origination fee might be acceptable and we will revisit this at end of this article.
The borrower’s appraisal fee was $460. The appraisal was not waived in this case and the fee had to be paid. Most lenders will ask you to pay for the appraisal while your loan application is in process as this is general practice. For your particular loan, you can check with your lender if appraisal can be waived and it certainly doesn’t hurt to ask. This is usually a YES or NO thing and doesn’t involve any negotiation.
Initially, the cost offered by the lender was $2,534 as you see above. However, we were able to shop and find a company that offered the exact services for $1,100. In this borrower’s case, the quotes received ranged from $1,100 to $2,500. Such a wide range can have a significant impact on the final closing costs if you don’t take the time to shop for these services. So, Google and find a few title companies near you and email them for quotes. Get the best one possible and send that to your lender. In some cases, the lender might have a deal with a title company whose costs may not be easily beaten. In that case, just go with the lender’s preferred title company.
The Taxes and Government Fees which will vary considerably between states was $40 in this borrower’s case.
As we discussed in our previous post, we know that we should not consider sections F – which contains the prepaids, and section G – which contains the escrow payments, as fees towards refinancing. These are expenses that you would have experienced irrespective of whether you refinance. This becomes even more important when your goal is to refinance without closing costs.
Considering this, the total expenses to refinance the mortgage based on the loan estimate for this borrower came to A + B + C + E = $1,600. Not bad, right? So, how did the borrower of this loan refinance without closing costs when he actually owed $1600? This is where this tiny little thing called LENDER CREDITS come into play!
“Lender credits are cash credits given by the lender to the borrower to be applied towards the loan’s closing costs.”
Here is what happens when you go to these small or online only mortgage lenders and they successfully process your loan application. In the background, most of these lenders just turn around and sell your loan for an incentive. Depending on the merit of your loan which includes factors like your credit score, loan to value ratio and interest rate, this incentive that these small lenders receive for selling your loans will vary.
The lender, in the form of lender credits, is simply sharing with you, the profit that they will be making from this incentive that they earn when they sell your loan. Again, this lender credit amount does vary based on the interest rate and term you choose.
What does this mean? Assuming you have a good credit score, the key is to choose a lender who is willing to offer you an interest rate that is at par or below the nation’s average rate while offering you the maximum lender credit so you will be incentivized to pick them to be your lender.
Lender credits is one of the main reasons why you should go to small or online only lenders for your refinancing. Big banks may not be able to offer such credits due their high budget marketing costs and for a few other reasons that we don’t want to get in to.
As you see here, it was $4,600! Lender credits is usually a percentage of the loan amount. In this case, it was 1.269% of the loan amount for a 30 year loan with an interest rate of 3.25% without any loan origination or underwriting fees and without buying any points, of course.
So, in this case, the total expenses were $1,600 and the credit received was $4,600. This means that with the additional $3000 the borrower was able to use towards the prepaids and the escrow account which he otherwise would have had to pay from his own pocket.
If according to the industry experts, Lender Credits are a tradeoff to just slap you with a higher interest rate, how did this borrower get lender credits worth $4,600 while getting an interest rate of 3.25% which was below the national average rate at that time?
We don’t mean to make this any more complex, but the buck doesn’t stop here. Now, for this borrower’s credit score, he was eligible to get an even lower interest rate of 3.125% but he would have only received $2100 in lender credits. He would’ve had to give up $2500 in cash to go down 1/8th of a percent. Doing so would only save him $25 in monthly payments. The break-even period for this $2500 is 100 months! Which is over 8 years! Who knows if he will keep this loan for 8 years? What if he refinances again in a year or two? That means, he threw money away today. What if he has to sell and move in 3 years? Again, he threw money away today by taking 3.125% instead of 3.25%. A break-even of more than 2-3 years is too long in our opinion. So, he decided to take 1/8th of a percent in higher interest to get $2500 more in lender credits.
The ultimate goal here is to stay on par or below the nation’s average interest rate. Ask your lender what lender credits are available for different interest rates. Then calculate your break-even period between those rates and pick one that suits you. Also, interested in what the big banks were offering for this same borrower during that time? It was 3.375% with ZERO LENDER CREDIT. In fact, they wanted him to pay an origination fee and buy points as well! Now do the math as to why you should find a small or an online only lender!
If you think this case is just an anomaly or just some stroke of luck, how about we share another real-life example? This loan estimate belongs to a friend of ours. He lives in the same neighborhood and owns an almost identical home. He was impressed with our refinancing story and asked that we help him. And here is a copy of this friend’s loan estimate that was issued around the end of July 2020:
The interest rate he was offered was 2.625%. To confirm that this was below the nation’s average rate at that time, please check this screenshot and you will find that it was 2.99% on July 30th 2020:
As you can see in the below images, his total costs came to
Total Costs = Sections A + B + C + E = 0 + 112 + 925 + 40 = $1077
And have a look at his lender credits, it was $3,852!!
So, by refinancing his mortgage, in addition to saving tens of thousands of dollars in interest over the period of his mortgage, our friend managed to get an extra $2,755 to fund his prepaids and escrow payments!
Alternatively, he was offered an even lower rate of 2.5%, with $1800 in lender credits. He did his math and decided to go with 2.625% and $3852 in lender credits. That is a call that each individual has to make for their own depending on their plans for their home and their mortgage. Again, interested to know what the big banks were offering when we locked this offer for our friend? It was 3% interest, with ZERO lender credits along with an origination fee and around $1700 in fees to buy points. And obviously, there were title fees on top!
Now that you are equipped with all this powerful information, what next? We all know Knowledge is Power! The mortgage industry wants you to buy points and doesn’t want you to ask for any lender credits. Let us break the mold and be different.
On that thought, here is our finance guide for you today. Put in the work, go shop and find the best small lenders around you. Or look for online only mortgage lenders that are licensed in your state and make the best ones fight for your business.
Start by emailing them and provide basic information like you home value, loan amount and credit score. Ask the lenders what they can offer you. Once you shortlist a few lenders, submit applications to them. Though each application will result in a hard credit pull, many FICO algorithms treat mortgage applications submitted within 30 days (or 14 days for some algorithms) as a single pull. So, make sure you complete your shopping within that time frame. The shortlisted lenders should provide a formal Loan Estimate after you submit an application; narrow down to the ones that offer the best overall deal and have them fight for your business. And choose the best offer that helps you refinance without closing costs. Yes, it does take some work, especially now with the surge in refinance applications due to historically low rates. But it’ll definitely be worth it when you are smiling with all that extra cash and a lower interest rate!
Do remember that some of the information in this article might only apply for these specific borrowers’ state. For you, the cost involved might vary based on your individual state but the basic idea, remains the same.
Just so you don’t feel the information in this video to be a bit overwhelming, let us summarize it for you. Assuming, you are being offered a rate at par or below the nation’s average interest rate, if the expenses on your loan estimate in sections:
A + B + C + E > LENDER CREDITS, then you are paying money from your pocket as fees
If A + B + C + E < LENDER CREDITS, then frankly, you are sort of getting paid to refinance
It doesn’t matter whether your loan origination charge in Section A of your loan estimate is zero as long as the lender credits you receive make up for it.
We are not claiming that anyone who reads this article is going to get a deal similar to the two examples we discussed. But what we’ve shown you is that it is possible to refinance without closing costs. Now it is up to you to take our finance guide, put in the effort and get your refinancing done for yourself without any closing costs!