Mortgage Refinance: No Free Lunch, But Tasty in the Right Circumstances

What does it mean when a lender claims he or she is “paying your mortgage costs?” Well, it looks like that’s what they are doing because of the way many structure your Good Faith Estimates (GFEs). You’ll see a boat load of charges, and then (phew!) it shows the lender reversing or paying the fees. But there’s no free lunch!

If you really think the loan officer is absorbing your fees out of the goodness of his or her heart (and maybe you also believe in the Easter Bunny), then there’s this terrific short sale condo in a condemned building in Miami that I’d like to sell you! Just understand how this works–you will pay a higher than the average market par rate (the rate with one origination point and no discount points). Because you aren’t being charged for the expenses of originating a mortgage (which cost the lender money). The higher rate is just business and is not evil unless you think everyone should work for free.

These loans have their place, but are not always in your best interest. Typically, “no-cost” mortgages, with their higher rates, will cost the borrower more in the long run–because savings are immediate, but interest can be forever. So if you plan to keep that home and mortgage more than a few years you might want to pay the fees (and maybe even a discount point or two) to spend less over the life of the loan.

The easiest way to compare loans is to ask a few lenders for two pricing quotes on the same product. Get one with no lender fees at all (including the “garbage fees” like document drawing or courier fees or processing charges). Then another one with an origination fee–one percent of the loan amoun. Do that with several lenders and it makes it pretty easy to see who has the best deal. Get these charges in writing (GFEs) and go through them. The next step is running those quotes (include the points and any “garbage fees” like courier charges, processing or documentation fees) through a mortgage calculator and seeing which has the better APR.

Finally, the lowest APR isn’t always the winning deal. You can have two very different offers with identical APRs. One may have high costs but a very low rate. The other has a higher rate but almost no costs. Unless you KNOW you’ll be in the home for the duration of that mortgage, take the loan with the lower costs. Then you won’t be paying for a low rate on a mortgage you don’t even have anymore.

source: http://www.mortgagecreditproblems.com/blog/mortgage-refinance-no-free-lunch-but-tasty-in-the-right-circumstances