This is a very common question and a good one. When refinancing, we originate a whole new loan for you. On closing day, the title company will use the funds of the new loan to wire over funds to the previous lender and pay off your existing mortgage in full. Once your previous loan is paid off, the original lender mails you a check for the total amount of the funds you have in your escrow account. Typically, you want to allow four weeks to receive the check in the mail. In some cases, there is also an option to waive the new escrow account for clients who prefer to pay their taxes and insurance directly.
We know gathering tax returns and W2s is not fun, and we understand. When refinancing, a brand-new loan is created. To approve the loan, our underwriters require your most recent financials. It’s the same request as when you first purchased your home. Over the years, a client’s financial profile can change. Mortgage companies are required to verify the most recent employment info, credit report, assets, and insurance and property tax info.
Refinancing can have several benefits depending on your goals. Refinancing your mortgage to a lower interest rate will lower both your monthly payment and the monthly interest you pay over the life of the loan. This can free up funds to help you pay off other debts faster, increase your savings, or have more money to invest. A bonus feature is the potential to remove Private Mortgage Insurance (PMI). If you put less than 20% down on your home when you purchase it and the value of your home has increased, there is an opportunity to lower the PMI or have it completely removed.
You can also access equity in your home in the form of a Cash-Out refinance. Homeowners often use those funds to pay off high-interest credit cards and other debts. Often, many of our clients will use the funds to renovate to their home. We’ve even seen a few borrow the cash to start up a new business!
Unfortunately, the answer is no. Many companies market this without giving an honest explanation of how it actually works. There are two ways to do this. First off, you never want to confuse "No Costs" with "No Cash Needed for Closing". These are two very different things. Some lenders advertise "No Costs" but in reality it's just "No Cash Needed for Closing".
Here's how it looks. The lender orders the payoff on your current mortgage which is $290,000. The closing costs are $10,000. The lender makes your new loan amount $300,000. The $300,000 new mortgage pays off the $290,000 current mortgage and absorbs the $10,000 in closing costs. You then have nothing to bring to closing, and the lender advertising it as "No Costs". In reality, you paid $10,000 in closing costs. It was just rolled into the new loan. That is called "No Cash Needed for Closing" and it's unethical and dishonest to market it as "No Costs".
The other way works like this. Your current rate is 4.25%. The lender offers you an attractive new rate of 3.25% and "no costs". It sounds like an amazing deal and you jump all over it. What the lender does not tell you is, you actually qualified for a rate of 2.75%. At a higher rate, the lender makes a much bigger profit. That extra profit is then used to offset the closing costs on your loan. So in this case, although you didn't technically pay closing costs, you're paying it in the form of a higher mortgage payment. In the long term, you will end up paying a lot more than what the closing costs would've been.