Editing Refinancing (section)

=== No closing cost ===

Borrowers with this type of refinancing typically pay few if any upfront fees to get the new mortgage loan. This type of refinance can be beneficial, provided the prevailing market rate is lower than the borrower's existing rate by a formula determined by the lender offering the loan. The appraisal fee cannot be paid for by the lender or broker so this will always show up in the total settlement charges at the bottom of your [[good faith estimate]] (GFE).

This can be an excellent choice in a declining market or if you are not sure you will hold the loan long enough to recoup the closing cost before you refinance or pay it off. For example, you plan on selling your home in three years, but it will take five years to recoup the closing cost. This could prevent you from considering a refinance, however if you take the zero closing cost option, you can lower your interest rate without taking any risk of losing money.

In this case the broker receives a credit or what's called [[yield spread premium]] (YSP). Yield spread premiums are the cash that a mortgage company receives for originating your loan. The broker provides the client and the documentation needed to process the loan and the lender pays them for providing this service in lieu of paying one of their own loan officers. Since a brokerage can have more than one loan officer originating loans, they can sometimes receive additional YSP for bringing in a larger volume of loans. This is normally based on funding more than 1 million in total loans per month. This can greatly benefit the borrower, especially since April 1, 2011. New laws have been implemented by the federal government mandating that all brokers have set pricing with the lenders they do business with. Brokers can receive so much YSP that they can provide you with a lower rate than if you went directly to the lender and they can pay for all your closing costs as opposed to the lender who would make you pay for all the third party fees on your own. You end up with a lower rate and lower fees. Since the new RESPA law<ref>{{cite web |url=http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respa_hm |title=RESPA - Real Estate Settlement Procedures Act Home Page - HUD |website=portal.hud.gov |url-status=dead |archive-url=https://web.archive.org/web/20110411151150/http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respa_hm |archive-date=2011-04-11}}</ref> as of April came into effect in 2011, brokers can no longer decide how much they want to make off of the loan. Instead they sign a contract in April stating that they will keep only a certain percentage of the YSP and the rest will go toward the borrower's closing cost.

True No Closing Cost mortgages are usually not the best options for people who know that they will keep that loan for the entire length of the term or at least enough time to recoup the closing cost. When the borrower pays out of pocket for their closing costs, they are at a higher risk of losing the money they invested. In most cases, the borrower is not able to negotiate the fees for the appraisal or [[escrow]]. Sometimes, when wrapping closing costs into a loan you can easily determine whether it makes sense to go with the lower rate with closing cost or the slightly higher rate for free. Some cases your payment will be the same, in that case you would want to choose the higher rate with no fees. If the payment for 4.5% with $2,500 in settlement charges is the same for 4.625% for free then you will pay the same amount of money over the length of the loan, however if you choose the loan with closing cost and you refinance before the end of your term you wasted money on the closing cost. Your loan amount will be 2,500 less at 4.625% and your payment is the same.