1) Use the "yield spread premium". Under
this program, Lender will pay all of the closing costs associated
with your loan for you. You incur no cost in the transaction. Lender
uses what is referred to as the "yield spread premium" from slightly
higher than market interest rates to pay these costs for you. While
Lender can pay both your closing costs (the true cost of the
transaction) and prepaid items (escrow items for taxes and
insurance), many clients using the program decide to have Lender pay
only your closing costs. This is because your current lender has an
escrow account with approximately the same amount Lender may require
to establish a new escrow. Your current lender will refund their
escrow account usually 30 days after closing.
Depending on your loan amount, "No Cost" refinancing
is typically .375% higher. The beauty of the program is that you can
lower your payment at any time the no cost rate is lower than your
current rate. The old "rule of thumb" was that you had to lower your
rate by 2 percentage points for refinancing to make sense.
2) Roll in your costs. Under this program, assuming
you have equity in the property, lender can add your closing costs
and/or escrow amounts to your loan balance. The advantage is that
you will pay market rates. All the comments about closing
cost/escrow amounts above apply. Rolling in your costs can be a
better option for a "no cost refinance" if you have the equity and
expect to remain in the home for more than 5 years. Consider this,
if you have a $100,000 mortgage balance, and the market is at 8%
without points, lender may have to increase the rate to 8.250% to
get enough "yield spread premium" to pay your costs, but if your
costs are only $1,000, added to your balance will only be a
negligible increase in your payment.
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