Anonymous wrote:OP here again. Probably stupid question but what is the incentive for a lender to offer a no cost refi? I mean, how do they get paid?

To the PP - I don't have the stomach for an ARM. We will probably sell in 3 years but might rent if the market isn't great. We are military so we just don't know. We go where and when they send us.

They get paid by charging a slightly higher interest rate (but still lower than your current rate), e.g., you might pay $20 a month more than the lowest rate anyone offered you but you would not have to pay $2k in closing costs. This has always worked out for me and seems like it makes sense for you too given your circumstances. Look at Amerisave rates if you want to see how it works.

OP here again. Probably stupid question but what is the incentive for a lender to offer a no cost refi? I mean, how do they get paid?

To the PP - I don't have the stomach for an ARM. We will probably sell in 3 years but might rent if the market isn't great. We are military so we just don't know. We go where and when they send us.

Anonymous wrote:We bought our house a year ago using a VA loan and got a good rate (4.5%), fixed, 30 year. Our mortgage guy approached us a few weeks back about refinancing and is offering 3.5%, fixed, 30 year and says closing costs will only be 2k. We will save about $160/month on our mortgage and will pay the 2k out of pocket so we don't add to our mortgage amount. Of course, the terms of the loan will reset so we'll 'lose' the year that we've been paying for. Trick is, we are military and might need to sell in 3 years. At a savings of $160/month, we'll break even on out of pocket costs after a year but I'm worried about the added interest on the loan. If we might sell in 3 years, is that really an issue? Of course we might end up here for longer or might decide to rent so I need to keep a longer term plan in my mind.

Would you refinance under these conditions? I'm so confused! It seems like a good deal but I am so afraid of doing something wrong that will put us in a financial bind down the road. Help!

Is your plan to keep your place when you move and use it as a rental property? OR sell?

If you are planning to sell, I would look into the PenFed 5 year ARM - it has no closing costs and the rate is 3%.

I agree-- find a no-cost refi and then any monthly savings are profit.

OP, I would just ask about a no-closing-cost mortgage. Then you don't have to worry about when or if you move. We got one in June for 3.5%. Just because your previous broker approached you doesn't mean you have to use him (even if he did a good job). If you're going to refinance, it pays to shop around.

OP here. Thank you, this is all really helpful! I'm not sure why he approached us honestly and I wouldn't have pursued it myself but he did such a great job for us when we bought the house (every time we spoke, closing costs had gone down and we paid nothing out of pocket in the end). I'm assuming what he is selling is a refinance? Is there something else I should be looking out for?

To 12:39 - we owe about 319k right now. Sounds like based on that, it might be a good decision for us to move forward - which is what my gut is telling me. I just have news stories in my head of people underwater, etc and I'm terrified that will be us. Especially since the military will tell us when we have to move. Of course, we can always rent our place out and we might and if so, a lower mortgage would definitely help us in that regard.

It really depends on the amount of the loan, since that determines how much interest you will pay. If you were staying the full 30 years, of course the 3.5% rate would be better in the long term. The only question is whether it would be better to refinance if you end up having to sell in three years. I did some quick numbers, and it looks like the break-even point is around $300k. Basically, I checked to see which would leave you with more equity in the house three years from now, refinancing or simply applying the $2k you would use for closing costs into a one-time payment on your current mortgage. If the loan is less than $300k, then you are better off just paying towards your current mortgage. If it is more than that, you start seeing better returns on refinancing instead.

If you have a decent mortgage broker, they should be able to sit down with you and run specific numbers to tell you exactly what the difference would be three years from now, five years, etc., so you can get a better idea of the long term results of the refinance. That's what I suggest you do, since I'm using several estimates and assumptions that may or may not be accurate.(For instance, if you make more than the minimum loan payment, it will change the break-even point) I wouldn't focus on the actual interest(You aren't really adding interest, since the lower rate will more than cancel out an extra year in the long run). Instead, just focus on the amount of equity you will build up. That's all that will really matter when it comes time to make a decision.

I don't think you can refinance a VA into another VA without costs. Correct me if I'm wrong...

Why is your mortgage guy approaching you so soon? Have you been inquiring or his he trying to sell you something?

I'd find a no-cost loan and then do it. I refinanced after eight months in my house because it shaved $203 off my monthly payment, and didn't cost me a cent. I wouldn't worry much about the added year, especially if you're unlikely to keep it 30 years anyway.

Eagle Bank did my no-cost refinance. I had to come up with a check for the new escrow account, but then got the old escrow account refund check in the mail a couple weeks later.

We bought our house a year ago using a VA loan and got a good rate (4.5%), fixed, 30 year. Our mortgage guy approached us a few weeks back about refinancing and is offering 3.5%, fixed, 30 year and says closing costs will only be 2k. We will save about $160/month on our mortgage and will pay the 2k out of pocket so we don't add to our mortgage amount. Of course, the terms of the loan will reset so we'll 'lose' the year that we've been paying for. Trick is, we are military and might need to sell in 3 years. At a savings of $160/month, we'll break even on out of pocket costs after a year but I'm worried about the added interest on the loan. If we might sell in 3 years, is that really an issue? Of course we might end up here for longer or might decide to rent so I need to keep a longer term plan in my mind.

Would you refinance under these conditions? I'm so confused! It seems like a good deal but I am so afraid of doing something wrong that will put us in a financial bind down the road. Help!