Why do I have to pay thousands for my "no-cost" loan?

Posted by  on Sep 14, 2011

I was getting ready to close my mortgage refinance when I got a shock. The refinance mortgage is supposed to be a no-cost deal, but my closing statement includes things like property taxes, hazard insurance, and prepaid interest and these things add up to over five thousand dollars! Are mortgage lenders allowed to increase the costs like that?

Your closing statement should not be very different from the Good Faith Estimate that you were given when you compared mortgage quotes and chose your lender. In fact, legally your loan fees and rate can't change once you have received your final disclosures (generally, when you lock in your loan). There are three sets of charges:

Lender fees

These are paid to the lender to compensate it for underwriting and funding your refinance mortgage. You either pay the lender charges to get the best mortgage rate, or you choose a loan with less favorable terms and pay fewer fees. Examples of lender fees are:

  • Origination fee
  • Discount points
  • Underwriting fee
  • Documentation fee
  • Processing fee

Third-party fees

Some expenses associated with refinancing your mortgage are for services provided by third parties, not your lender. These include fees for the following:

  • Credit report
  • Appraisal
  • Title insurance
  • Escrow

Prepaid expenses

Then there are charges that have nothing to do with your refinance. They are just costs of home ownership, collected by your lender but not paid to your lender. These are:

  • Property taxes
  • Hazard insurance
  • Interest

Lenders may require that you prepay some of these items into an impound account. When the payments come due, the lender makes them on your behalf. You may be allowed to avoid the impounds if you have at least 20 percent home equity, excellent credit, and pay a fee (0.125 to 0.25 percent).

What's a no-cost refinance?

"No cost" can mean different things to different lenders. It could mean no lender fees are being charged. It could mean no lender or third-party fees are being charged. It could possibly mean no fees or prepaid expenses. Or it could mean that the charges will be rolled into your refinance, so you won't pay out of pocket but you'll still be charged. Check your final disclosures to see what you can expect to pay at closing, and voice your concerns if they are not what you expected.


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