What is a Zero-Cost Refinance?

From my perspective, it makes economic sense to refinance anytime a Zero-Cost refinance is possible. “ZeroCost” is not a particular loan program – it is just a method used to increase the rate sufficiently to cover the closing costs, paying the costs and/or additional points will provide an even lower rate.

When “Discount Points” are paid, one pays money at closing to obtain a lower interest rate. The opposite is also possible where a slightly higher rate is paid in exchange for an up-front credit. An example is:

Rate % Points Points $ Closing Costs $ Total Costs $
3.000 1.125 10,536.08 3,512.00 14,048.08
3.125 0.625 5,853.38 3,512.00 9,365.38
3.250 0.125 1,170.68 3,512.00 4,682.68
3.375 -0.375 3,512.03 3,512.00 -0.03
3.500 -0.75 -7,024.05 3,512.00 -3,512.05

(above example is a $984,500 15yr Fixed)

A “Zero-Cost” refinance is when we use the up-front credit so the closing costs are not paid out of pocket or added to the loan balance. In the above example, the closing costs are identical regardless of rate, however if the rate is 3.375%, we can have a $3,512.03 lender credit applied which covers the closing costs.

Another option is for us to set the pay-off date to match the current loan payoff date. As an example if you now have a 15yr Fixed was originated in June 2011 the 180th payment should be due July 1, 2026 which leaves 14 years (or 168 payments remaining) – so rather than setting the new loan as 180 months, we can set it at 168.

Once it is determined that refinancing makes economic sense, we can analyze whether using Lender Paid, Borrower Paid, (or even additional points) makes the most sense for each client’s unique situation.

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