A No Cost loan is a loan in which all fees and expenses incurred during the refinance (ie…Closing Costs) are off-set by a lender credit applied at closing. That credit would be a function of interest rate (click HERE for more info on selecting an interest rate.) Essentially, the credit would cover “tax, tag, and title” as they say in the car business. Just to be sure we’re on the same page, we are NOT simply ‘rolling’ those costs into your loan amount and then saying ‘Look, you don’t have to bring any money to closing!’
In this way, you can keep more of your equity in your house and NOT have to pay thousands of dollars in costs every time you refinance.
The ONLY items not included in a No Cost scenario would be setting up your Escrow Account and Pre-Paid interest.
Obviously getting something for free is always nice but keeping more equity in your house or money in your wallet is even nicer.
Traditionally, borrowers had to pay thousands of dollars every time they bought a new home or refi’d an existing one. That certainly cost you money but it may have also cost you opportunities over time; opportunities to make changes to your mortgage as you experienced changes in your life.
For example, with kids in college, reducing your monthly mortgage payment via an ARM might make sense. Once the kids graduate, however, it might be time to shift gears again, move to a 15yr fixed rate loan and focus on creating more equity. In the past, there was a hefty price tag in the form of closing costs each and every time you refinanced. With a No Cost loan, that cost barrier is removed whether refi’ing to better reflect your changing circumstances or simply trying to drop your rate and save some money. It also reduces the pressure associated with timing the market ‘just right.’
Today, you might be able to save $200/mo. via a No Cost loan. In 6 months, you might be able to save an additional $150/mo. With no closing costs, there is no barrier to taking in advantage of that changing market and dropping that rate even further when the opportunity presents itself.
Appraisers want to get paid for their services, title companies perform tasks that have costs associated with them, and your City, State, and County might apply some tax and recording costs. The question then is ‘Who is going to pay for all that stuff????’
With the NO Cost option, WE do!
That probabaly means the next question is ‘How do you pay for all that stuff?’ The answer is via the rate.
Cost is a direct function of rate. Basically, just like a see-saw on playground, if one side is rate and the other is cost, pushing down on rate causes cost to go up and visa-versa. With a No Cost option, we increase rate slightly to generate a higher credit or yield. We then take that credit and pay those costs for you.
It may sound strange but Math is your best friend when it comes to shopping for a mortgage. Your calculator probably knows very little about mortgages but it is an expert on Break-Even Point Analysis.
So, what is Break-Even Point Analysis? It is a fancy term for a very simply and common sense approach to evaluating loan options. We already know rate is a function of cost (remember our see-saw example.)
Here at Brightpath, we like to give you options since not everyone’s situation is the same. One potential option is a NO Cost loan where WE pay the cost, the second is a ‘Par rate’ (ie… a point at which we do not generate a credit OR cost associated with the rate leaving YOU to pay the basic closing costs, and a third option providing the prettiest rate but ugliest closing costs (remember, as rate goes down costs go up due to something called Discount Points.) So, now we have a few options to choose from, how do we pick the right one?
The first step in comparing options is to identify the difference in closing costs. We then determine the difference in monthly payment (ie…savings derived from the lower rate.) Divide our savings into what we paid to get it (ie… closing costs) and that’s your Break Even Point! It is the number of months or years needed to recoup your upfront investment in the form of closing costs via the monthly savings. The shorter the term, the better a deal.
Additionally, you need to be sure you’ll have the home long enough to not only meet but beat that break-even point. It’s kind of like ordering the All You Can Eat buffet and then getting filled up on salad and breadsticks. You spent $29.99 to eat $4 worth of lettuce. Not a good deal! If you pay the additional cost, be sure you’ll be around long enough to take full advantage of it.
Here is a quick table to illustrate the Break-Even Point analysis process:
Based on the figures provided, it would take 8.3 or 8.7yrs for the lower rates to, in fact, become the ‘better’ rates. If you plan to live in the home for 20yrs, Options II and III could be great choices. However, if you plan to downside or relocate at any time prior to 8.3 years, you are better off with Option I.
Get answers to your credit score questions.
It’s virtually impossible to change your credit score in the time between when most people decide to buy a home or refinance their mortgage and when they apply. So the short answer is, you really can’t “on the spot” with your credit score. However there are strategies you can live with to make sure when you apply for a loan your score is as high as possible.
Make sure that the information each of the three credit reporting bureaus has on you is consistent and up to date. Order a copy of your credit report about once a year, and dispute any inaccuracies with the credit report.
Note: Theoretically, if a series of credit reports is requested on your behalf during a limited amount of time, your credit score goes down until time passes without any inquiries. Changes in the law though have made “consumer-originating” credit report requests not count as much. Also, a series of credit score requests in relation to doing a refinance or getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus, and lenders, realize that people request their own credit reports to keep up with what’s on them, and smart consumers shop around for the best mortgage and car loans.
Unsolicited credit card solicitations in the mail don’t count against your credit report or credit score, so don’t worry.
The two main components of your credit score are your payment history and the amounts you owe. Bankruptcy filings and foreclosures, which can stay on your credit report for as long as 10 years, can significantly lower your credit score. It’s never a good idea to take on more credit than you can handle.
Late payments work against your credit score. It’s extremely important to pay bills on time, even if it’s only the monthly payment. Don’t “max out” your credit lines. Since the size of the balance on your open accounts is a factor, lower balances are better.
It’s said that by carefully managing your credit, it’s possible to add as much as 50 points per year to your credit score.
A Home Affordable Refinance Program (HARP) loan could be a great option if you are like millions of Americans that have seen their home values decrease over recent years. Especially if you are underwater (owe more than the value) on your loan at this point. A HARP mortgage allows homeowners to still take advantage of today’s low rates, often times, in spite of their equity position.
Have you ever heard the term ‘Liar Loan;’ a loan that allowed the borrower or lender to state the income without verification?
Well, a Qualified Mortgage would be the Liar Loan’s more honest counterpart. In accordance with some legislation created in the wake of the Mortgage Meltdown in 2008, lenders are now required to ‘make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.’
Essentially, if we can’t prove it, we can’t lend it and it is a return to the more thorough credit analysis of the past. The net result should be a continued reduction in loan defaults and a better process of insuring borrowers are placed with the appropriate loan terms.
Escrow Accounts – What are they, how do they work, and do I want one?
An escrow account is a piggy bank held by your lender to pay for property tax and insurance bills when they come due. A portion of each month’s payment is placed in that piggy bank to insure you’ll have the right amount on hand when that tax or insurance bill comes knocking. At the end of each year, your lender will conduct an Escrow Analysis to verify they are on track and not collecting too much or too little as those bills can change from time to time.
In some cases, borrowers may prefer to manage it themselves and opt to ‘Waive Escrows.’ To do so, there is typically a loan to value requirement of 80% and a small at-closing fee may be assessed. Other folks simply prefer having one or two less bills to worry about and appreciate that the costs are spread out over the course of the year.
Of course, if you sell your home or pay-off your mortgage via a refinance, the balance of your escrow account will be refunded in full within 30 days. If you are setting up a new escrow account as part of a purchase or refi, we will calculate the amount needed to essentially ‘load up’ that piggy bank based on the closing date and how soon those bills will be coming do. Escrows may also be referred to as Pre-paids and, while part of the closing process, are technically not closing costs as they are funds set aside for your benefit.
The answer to this question can vary quite a bit based on a few factors.
The Borrower Themselves -> Today’s mortgages involve a fair bit of paperwork and supporting documents (W-2s, Tax Returns…) The more quickly and accurately those items are submitted on the front end, the quicker your file will pop out the back-end. Additionally, some borrower’s files are simply more complicated than others which can affect turn-times.
The Loan Officer -> A knowledgeable and well-trained loan officer can help to foresee issues before they arise and avoid unnecessary delays and additional frustrations.
The Market at Large -> When rates are really low, folks are more inclined to refinance. More loans equal longer turn times not only with lenders but also appraisers, title companies, and every other service provider in the process.
The Lender Themselves -> Not all lenders are created equal and some are simply more efficient and effective at moving your loan through the pipe.
BrightPath prides itself on being very responsive and scalable. Our loan officers work closely with the borrowers to educate them on the loan process and help navigate around potential road blocks. We also have a great team of 3rd party providers and a underwriting system that can adapt to the ebbs and flows of the market. We strive to keep turn times at 30 days and can often close even sooner. Please note, on purchases, the closing date is usually set per the contract but we have been known to close in as little as 10 days when requested!
PMI or Private Mortgage Insurance is an insurance policy taken out by the lender and paid by you. It is required anytime your loan to value (LTV) exceeds 80% and helps to hedge against the greater risk associated with lower equity positions. The cost of that insurance is a function of your LTV (ie… the lower the equity, the higher the cost,) your credit, and the type of loan transaction.
PMI comes in a few different shapes and sizes with the two most common options being Borrower Paid Monthly and Lender Paid Upfront. With Borrower Paid, the PMI expense is included in your monthly payment and required for a minimum of 24 months. At the end of 24 months, the homeowner may request an updated appraised value. If that value results in a 20% or more equity position, the PMI will be cancelled. In absence of an updated value, the PMI will automatically be removed once the borrower reaches a 78% loan to value via their monthly payments. Lender Paid MI is often a less expensive option but is ‘baked’ into the interest rate. In this scenario, the borrower would agree to take a higher interest rate in lieu of paying PMI. Again, this is typically provides a lower overall payment but cannot be removed since it was incorporated into the rate. Based on recent changes in tax law, Borrower Paid Monthly PMI is no longer tax deductible which may also influence which route is best for you.