There is no word in the English Language that carries more emotional baggage than “Free.”
We are introduced to Free at a very young age. We get a Free Toy in our Happy Meal. A Free lollipop at the doctor’s office. A Free surprise in a cracker Jack Box. WE LOVE FREE!
Unfortunately as we age our love affair with Free begins to fade. We are filled with advice from society. “There is no such thing as a Free Lunch!.” The few “Free” items we continue to receive are either Promotional… Or worthless… Or quite often a combination of both. Please enjoy this free paperweight with our Prominent Company Logo! Sweet.
By the time we are ready to buy or refinance a home- We are downright skeptical. For many the notion of a “Free Refinance” mentally translates to
That would actually be a mistake. The fact is that a “Free” refinance is very common and in fact the most typical refinance sold here at Community First Mortgage.
How a “Free” refinance is accomplished.
First and foremost- There are a number of people compensated for their work during a refinance. It might be free to the consumer but no-one works for free in our industry. The lender is going to charge a fee to process and underwrite your file. An appraiser is going to come out to your home and give a determination of value*. An escrow company is going to handle all of the funds on the transaction. A Title company will issue Title Insurance to protect the lender’s investment. There will be a notary involved and even a governmental fee or two thrown in there too. All told- On a $400,000 refinance today we estimate ~$2800 in third party fees. So- How does this become free? Lender Credit.. Let’s dive into a scenario from today.
$800,000 Value. $400,000 rate and term refinance. 740 credit score. Today we offer…
A $400,000 30-year fixed rate mortgage at 3.5% with monthly payments of $1796.18 principal and interest. This loan would have $2500 in points on top of traditional closing costs.
A $400,000 30-year fixed rate mortgage at 3.625% with monthly payments of $1824.21 principal and interest. This loan would have no points and a $400 lender credit towards closing costs.
A $400,000 30-year fixed rate mortgage at 3.75% with monthly payments of $1852.46 principal and interest. This loan would have a lender credit of $3700 towards closing costs. This is the “Entirely Free” option.
So- 3 different options… Which is best for you as a consumer? Each .125% saved on $400,000 equates to $500 per year in interest. An amount that decreases slightly each year as you owe less. Option 3 is .25% higher than option 1 so you spend $1000 more per year in interest. BUT- You save over $6000 more today. Takes more than 6 years before you “Break Even” buying the lowest possible rate.
The decision becomes essentially do I buy the best rate on the board… the middle road… Or take the most lender credit available today? Most consumers first reaction is the lowest rate possible. It is a 30-year fixed rate mortgage after all… And it comes with the lowest payment. You can finance the costs… So why not take the rate that saves the most money over 30 years? The answer is that life happens. You upgrade to a larger home. You downsize to a smaller home. You move because of a relocation. You move to be closer to your family. You then move to get a bit of distance from your family. Millions of Americans will move this year… And many of them did not anticipate the move. Even if you love the house and you never move- Finances happen. You can decide to spend $100,000 upgrading your home- And use a cash out refinance to make that happen. If you see the perfect investment but need $200,000 to make it happen- Pulling cash out of your home is often the cheapest source of financing available.
And the entire previous hypothetical doesn’t even touch on rates. Even if you stay in your home 6+ years and you never take cash out- What is to say that today is the best rates you will see for the next 6 years? I mean it’s my job to say RATES ARE AMAZING! (And they are at the moment). But looking at the previous 10 years- 7 of those years were wrong. As in – The client that thought to buy the best rate in 2007, 2008, 2009, 2010, 2011, 2014. 2015. No matter when they timed them they were all wrong. Not their fault. In some cases they were working with the best rates in HISTORY (For that time). Very reasonable to believe they couldn’t go lower. But they did- And better options existed within 6 years for all of those clients. In some cases rates fell a full percent within 12 months. Will 2017 be any different? We don’t know. But we do know that if you aren’t breaking even on your refinance fees within 4 years we typically advise sticking with the “Entirely Free” loan option.
Ready to get started with a no-cost refinance? If your property is located in California, click the Green button below to receive a no-cost, no obligation refinance rate quote. We are tough to beat on rates and service! If your property is located outside of California we recommend finding a couple well-reviewed mortgage brokers in your area and compare their rates. Good luck!
