Zero Cost Loans

Thousands of homeowners have refinanced using zero cost loans. Some refinanced multiple times, riding rates all the way down the curve in 1993, 1996, 2003, and, more recently, in 2009-2017.  The way this works is that there is a secondary market that buys the loans from all the lenders that make the loans.  This secondary market pays a premium for higher note rates, and this premium is passed through to the originating lender in the form of rebate pricing.  You can also think of this as negative points. This rebate pricing is used to pay for your closing costs.



Should I pay points and/or fees to get a lower rate?

If you will not keep the loan for more than 4 years, then the answer is definitely NO.



The best way to decide whether you should pay costs to refinance or not is to perform a break-even analysis.  We calculate this for you on every loan analysis in helping you decide which rate is best for you.


What are the benefits of a zero cost loan?

The main benefit is obvious…it is free!   As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. For example if you refinance on the zero cost loan to get a rate of 4.00% and the rates drop 1/2%, you can refinance again for free to 3.50%.

 

The Zero Cost loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates.

Zero cost loans are especially attractive when rates are declining or when you plan to sell your house in less than 5 years. Since 1993, we have saved 100s of borrowers several $1000s, several times, by recommending they do zero cost loans!



What are the disadvantages of a zero cost loan?

The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, AND RATES DO NOT GO LOWER, then you will pay more over the life of the loan since you have a slightly higher rate. In the scenario where you plan to stay in the house for more than 5 years, and rates never go lower, you could wind up paying more money. If, on the other hand, you plan to stay at a property for 5 years or less, there are no disadvantages of zero cost loans…..only advantages.



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