- The Washington Times - Wednesday, April 25, 2007

Q:I was reading a Web log about the so-called “no-cost” refinancing program. The

writer was criticizing any mortgage company that advertises these programs and actually calls them “no cost” loans because everything carries a cost.

I have read in your column about the same program and you seem to have no problem using this language.

Please explain.

A: You’re right. I have no problem calling a true no-cost refinancing program by that name, but your blogger is correct in that everything does, indeed, carry a cost. A true zero-cost refinancing program will carry an interest rate that’s about 1/4 percent higher than a loan that will carry standard closing costs.

These costs include appraisal fees, attorney settlement fees, lender underwriting fees, title insurance, county recording fees, and various other sunken costs.

On a $300,000 loan, these fees will exceed $3,000 in most areas.

To cover these costs, the borrower can opt for an interest rate, currently about 6 percent for a 30-year fixed loan, and pay these fees out-of-pocket at the settlement table. The borrower also may wish to fold these costs into the loan amount, keeping the rate at 6 percent but bumping the loan amount to $303,000.

The borrower may also wish to have these costs covered by the mortgage broker. In this case, the rate would be closer to 61/4 percent, but the loan amount remains at $300,000 and the borrower pays zero fees at settlement.

I don’t know what else to call this program except a “zero closing cost refinance.”

Any good loan officer will explain that a zero-cost refinancing loan carries a higher rate, but I have seen many instances where a certain bank is offering a 30-year fixed program with $3,000 in closing costs at the same rate that my company could offer with zero closing costs.

Your blogger is rightly objecting to any misleading sales tactics that give the borrower the impression that a zero-cost refinancing loan doesn’t carry a higher interest rate than the same program with fees and points.

The worst tactic is to market a mortgage program that carries closing costs as a “zero-cost” program where the costs are rolled into the loan amount.

Here’s the bottom line: The consumer should be apprised that there are several interest rate options available under the same mortgage program, such as a 30-year fixed-rate loan. The lower the rate, the higher the points and fees. The higher the interest rate, the lower the sunken costs.

Whether to choose a low-rate/high-fee program or a high-rate/zero-fee option depends upon how long you anticipate holding the loan.

Some simple calculations illustrate that it takes about 10 years to recoup points and closing costs in the form of a lower fixed interest rate.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).

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