[quote=harvey]The “semantic” debate comes down to this: loans always have a cost. There are two components to the cost:
– The interest
– The transaction fees
The “no cost loans” that lenders are pitching simply move the cost of the transaction fees to the the interest rate. The lender will always charge a higher rate to compensate for their lost transaction costs. “No cost loans” do not eliminate costs, they simply move them around.
There are situations when that may be advantageous to make that trade. A “no cost loan” is an alternative and can be completely legitimate, despite its misleading name. However for anyone who plans to keep a property for many years, trading upfront costs for a higher rate is probably not going to see as much net benefit from a “no cost” refi as they would with a lower rate, “cost” refi.
In many situations where a “no cost” loan is good, a “cost” loan may be better.[/quote]
Not really. As you have guessed I use to be a serial refinanced roughly every 2-3 years when rates fell more that 0.25%.
It really depends on the interest environment and your situation. When your at the start of 30 year loan almost all of your payments goes into interest so if rates on the new loan were significantly less, refinancing with a no cost loan you still came out ahead with no period to recover the loan. And in some cases, those low cost loans ended up rebating you several thousands of dollars. If you paid points or closing costs to lower your rate, chances are you got screwed because rates for those no cost loans ended up falling below that rate you paid points and closing costs on.
So, like I said it really depends ones personal situation whether a no cost loan or a loan with points/closing costs make sense.
In an environment when rates are rising or high, it might make sense to buy down your loan rates. In an environment when rates are low and flat or falling it probably makes more sense to have a no cost loan, since if rates fall even lower you can refi again and buying down a low rate loan probably makes less sense…and if rates don’t fall again, you still got a better loan than before.
Also, if you plan on selling your house way before the loan term is up or end up paying it off early, paying points/closing costs is just wasting money.
Also, in some scenarios, no cost loans simply does not exist. My only loan left is a 30year for one condo. I had to pay closing costs because the loan balance and nature or the loan did not allow for a no cost option, and I shopped around. Then again, that loan I won’t be refinancing because there is a no cost option and since its still way lower than the 8% ROI I get from the rent income. Which is one of the reasons why u haven’t paid it off. It cash flows even with 30year.
Plus to pay off that mortgage, I would need to sell stock. That means I would have to take a capital gains tax hit on my stock. And then I pay off my rental… Which means my net rental income is more…which means I would need to pay even more taxes on my net income from the rental…and the two combined would push me into an even higher tax bracket along with my W2 paycheck that already puts me into bad tax bracket….Uh no thank you. I’ll take anything that drives my rental investment costs up now to lower my rental income now and wait until my W2 is $0 before I want to realize more investment income elsewhere.
Its like 401k, deferring income until later when your paycheck income is less. Only its better than a 401k because there are a lot more variables to play with. The more variables and complicated it is, the better it is for you.
