November 9, 2011

Hey Zillow & Vera Gibbons: Please Learn The Mortgage Business

November 9, 2011

Hey Zillow & Vera Gibbons: Please Learn The Mortgage Business

Today Zillow’s blog ran a story by titled The Cost of “No-Cost” Refis. Good opening paragraph to introduce the topic, but lots of misinformation from that point forward. Below I explain and correct the post’s most misleading comments so consumers can actually learn what a no-cost refinance is.

First, it says a no-cost refi is a product. False. A no-cost refi is a pricing structure. A 30yr fixed or a 5yr ARM or other loan programs are products. If you’re a consumer inquiring about no-cost refis, ask your lender to see written terms on a no-cost refi and a zero-point refi so you can compare the two. The latter has closing costs without points. A third pricing structure would be closing costs plus points to buy your rate down further (point 4 below explains how you do the math).

Second, it says closing costs on a $200,000 refi are $4,000 to $6,000. Misleading. Closing costs on a zero-point $200,000 refi will be about $3600 or less with any reputable lender. I say misleading because closing costs can rise if the borrower is paying points to buy their rate down. But there’s no discussion of this in the post (I cover it in points 3 and 4 below).

Third, it says there’s “always a cost” to no-cost refis then offers scare tactics but no primer on evaluating costs. In the mortgage industry, higher rates mean lower costs, so lenders can offer a higher rate in exchange for crediting all closing costs to borrower. How much higher depends on mortgage bond trading any given day, because rates change in realtime as these bonds trade. Right now, a no-cost refi will have a rate that’s .125% to .25% higher than a normal-cost (zero point) loan.

Fourth, it says that you should only consider a refi if you “plan to stay in the home for a minimum of three years, and can lower your interest rate by half to three quarters of a percentage point.” Incredibly misleading because there’s no hard rule for every client. All loan decisions must be made on expected time horizon in the home, how long the existing loan has been in place, and total cost savings (interest rate AND closing fees).

If a borrower does a no-cost refi to save even .125%, there is zero breakeven time and the loan amount hasn’t increased, so it’s pure interest cost savings for the consumer the day it closes.

If a borrower is paying refi closing costs (with or without points) to lower their rate, it will take anywhere from six months to four years for the interest savings to repay the fees. Everything from that point forward is pure benefit. So the consumer must tell the lender how long they expect to be in the home, then the lender will work the breakeven math to determine whether a no-cost, cost, or cost-plus-points refi works best. Or maybe the math and borrower’s time horizon reveals they’re ok in their existing loan.

About The Author: The post was written by Vera Gibbons, a journalist and financial analyst (bio below). Vera, I haven’t seen your other work, but please understand that a piece like this adds to consumer confusion about mortgages. If you need to vet your ideas with a mortgage pro, I’d be happy to help. And if it’s not me, I hope you find other sources to help educate your readers.
The Cost of ‘No-Cost’ Refis: Zillow/Vera Gibbons
Vera Gibbons bio
Refi Roadmap: A Locked Rate Isn’t A Closed Loan

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