How to Find a No-Cost Mortgage Refinance at a Great Rate

At the lowest interest rates available!

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Mortgage interest rates are ridiculously low right now for well qualified borrowers (less than 3% as of early August 2021 for a 30 year fixed rate), and have been for much of the last year or so.  The trouble is, it’s not obvious how to actually get these really low rates, and how to do a ZERO cost refinance.  If you haven’t refinanced since July 2020, you should consider refinancing now, before the economy continues its post-pandemic recovery and rates go back up.  A lower interest rate can easily save you thousands of dollars per year on your mortgage payments.

Additionally, if you are paying primary mortgage insurance (PMI) on your current mortgage, and live in one of the many areas of the country with booming real estate prices, you should seriously consider refinancing.  You might not have put 20% down when you bought your house, but you might have 20% equity because your home’s value went up.  Take a quick look at recent home sales in your area on Zillow for comparable homes to estimate your home’s value, and calculate your loan-to-value ratio (LTV).  (Current balance on your mortgage / estimated home value = LTV).  If your LTV is less than or equal to 0.8 (or 80%), refinance!  

This article is focused on zero cost mortgage refinances, but it also applies to mortgages for a home purchase.  If you are thinking of buying a house, now may be a good time, despite some crazy home prices around the country.  The cost savings of a low interest rate loan can often outweigh small to moderate differences in home purchase prices.

A zero cost mortgage means that you pay zero lender fees or third party fees at closing.  In this type of loan, typically the lender will offer a credit that covers any fees that occur, providing a net out-of-pocket cost of about zero.  In exchange for this credit, you accept a slightly higher interest rate (typically about 0.125% higher) than you could have gotten without the credit.  See the below for more details, but this tradeoff is often a good deal.  

You will still have to have some money at closing to cover things like property taxes and homeowners insurance, which typically must be prepaid and/or pre-funded into an escrow account.  These are costs you would pay for anyway, even if you weren’t refinancing, so they aren’t a “cost” of the mortgage.  After closing, your old lender will refund your old escrow balance, which should cover much or all of the prepaids you had to pay at closing.

DO NOT FALL FOR BAD DEALS where the lender and third party fees are covered by an increased loan amount, or “rolled into” your mortgage.  This is NOT zero cost, as the costs are still paid with your money (your loan), plus you’ll pay interest on the fees for 15 or 30 years.

After dorking it up, I recommend:

Zillow Mortgage

  • Zillow doesn’t provide mortgages, but their site acts like a marketplace for lenders to advertise their mortgage products.
  • Zillow Mortgage is the easiest way I’ve found to find the lowest mortgage rates.
  • Provide them some basic info (zip code, loan value, property value, approximate credit score), and you’ll get some rates and fees from different lenders.  Check the “No fees, no points” box to see potentially zero cost loans.
  • Contact two or three lenders with good advertised rates for a formal estimate.  Tell them explicitly that you want a zero cost mortgage, with a lender credit to cover all lender and third party fees.  The lender will need to run your credit and get a few more details from you (your income, etc.) to give you a real estimate.  If you find a good deal, lock in your rate (quickly!), and formally apply for the loan.  How to identify a good deal?  Keep reading!
  • Rates and fees change DAILY.  More on how this works below, but any advertised rate or quote you receive is typically only good for right at that moment, especially for lenders that try to give the lowest rates possible.
  • The advertised mortgage offers on Zillow sometimes change drastically throughout the day, even more so than market rate fluctuations.  I’m not positive how it works, but I suspect that when a lender needs business, they put an ad up with a good rate.  When a lender is swamped with business, they may raise their rate or take the ad down, to slow new applications.  If you don’t see a good rate, try again later that day, or the next day.

Mortgage News Daily

  • Mortgage News Daily is a website / blog dedicated to the mortgage market, and is the best place I’ve found to get more info on current mortgage rates for today, or rate trends over time.  
  • They provide a daily average mortgage rate as determined by a survey of lenders.
  • You can watch these rates over time, and track when rates have gone up or down, to help judge if you should refinance now or wait.
  • In my experience, a zero cost loan for well qualified borrowers can be had for a rate about 0.125% to 0.25% BELOW the average listed on Mortgage News Daily.  They list an average rate across lots of lenders, we want the lowest rate we can get!

For example, as I write this (8/3/21), Mortgage News Daily shows an average 30 year fixed rate of 2.80%.  Zillow Mortgage shows advertised loans with zero fees from several different lenders available at 2.625%, assuming <80% loan to value (having at least 20% equity in your home), and a good credit score (740+).  You would have to get a real quote from a lender to confirm all terms of the loan based on your personal situation.  The approximately $2K “credits” listed by the lenders on Zillow is what would typically cover all the lender and 3rd party fees.  

The terms of the loan (costs and interest rate) will be worse if you need to borrow more than 80% of your home’s value, or if your credit score is lower.  No matter your situation, however, it will always pay to shop around for the best loan you can get!

Keep reading to Dork It Up!

This article will focus on identifying and obtaining a good deal on a mortgage.

Functional Requirements (in order of importance, for me):

  1. Cost – We need as low of an interest rate as the market can provide, without unnecessary fees.
  2. Terms – Make sure you get the loan product you want, without any detrimental terms.  In this article, I will focus on fixed rate mortgages.  Most people should not be getting adjustable rate mortgages (ARMs).
  3. Customer Service – Any lender you use should be easy to work with, and work quickly to close your loan before the rate lock expires.  

Cost

The whole point of a mortgage refinance is to save money.  We want to lower our interest rate, which will lower our monthly payment, without paying a bunch of fees to achieve this.

Interest Rate

The lowest rates are typically offered by high volume, online only lenders, with little name recognition.  They can offer lower rates because they have lower expenses (no physical retail space, limited advertising, etc.), and process lots of loans.  Your local neighborhood bank or mortgage lender probably can’t compete on price with online lenders.  The local mortgage lender your friends and family may recommend will likely give you a rate 0.25 to 0.5% higher than what you can find online.  While I love to support local businesses, your mortgage affects your finances for up to 30 years, and accepting a higher rate can cost you many thousands of dollars.  Online lenders with huge advertising budgets likely won’t offer the best price either. Rocket Mortgage’s superbowl commercials are ultimately paid for by its customers.

Here’s just one example of how even small changes in interest rates can affect your monthly payments, and how a lower rate can save you significant money, especially over time.  I like to look at costs and savings on a yearly basis.  In this scenario ($300,000 loan, 30 year fixed rate), a drop in interest rate from 3.5% to 2.5% will save you nearly $2,000 per year.  Think of it as a $2,000 yearly pay raise.  Extend this thought process to a 5 year or longer timeframe, and the savings become very significant.  If you have a bigger loan, or could get an even larger drop in your interest rate, the savings would be even more significant.

Loan Amount$300,000 $300,000 $300,000 $300,000 $300,000
Interest Rate2.50%2.75%3.00%3.25%3.50%
Monthly Payment (without Escrow)$1,185.36$1,224.72$1,264.81$1,305.62$1,347.13
Yearly Mortgage Cost$14,224.35$14,696.68$15,177.75$15,667.43$16,165.61
Yearly Savings vs. 3.5% Loan$1,941.26$1,468.93$987.86$498.18$0.00
Savings Over 5 Years vs. 3.5% Loan$9,706.28$7,344.63$4,939.32$2,490.91$0.00
Savings Over 30 Years vs. 3.5% Loan$58,237.69$44,067.79$29,635.91$14,945.44$0.00
Varying costs with different interest rates for a $300K loan.

Here’s a good mortgage payment calculator without a bunch of ads.

When you refinance, you will start your loan term over again.  For example, if you are 5 years into paying off your 30 year mortgage and you refinance into another 30 year loan, you’ll reset the clock and have payments for another 30 years.  In addition to the lower monthly payment from the reduced interest rate, you’ll also lower the monthly payment due to stretching out how long you take to pay back the principal.  The downside of this is that you will be paying interest for longer.  If this is concerning, you can always submit extra payments to pay off the loan sooner, and save on interest over the life of the loan.  If you pay one extra payment per year, you’ll reduce the payoff time by 3.5 years.  If you pay one extra payment per quarter, you’ll reduce the payoff time by 10 years!  Here’s a good payoff calculator.

If you can afford to get a shorter term mortgage, you should consider it.  Interest rates on a 15 year mortgage are typically even lower than a 30 year, often by 0.5% or more.  However, with rates as low as they are today, a longer term mortgage provides financial flexibility at fairly low cost.  You can pay the normal payment when the budget is tight, or pay extra as you wish to pay the mortgage down sooner and save on interest over time.  Different term lengths such as 20 or 25 years are sometimes available, but the rates often aren’t much different than a 30 year term. 

Mortgage Fees and Closing Costs

In addition to interest charges, there are other costs associated with obtaining a mortgage.  There are costs paid directly to the lender (application fee, origination fee, lender fees, document fees, credit report fees), costs paid to third party entities like the closing company or your local government (title insurance, settlement fees, recording fees, transfer taxes), and costs associated with prepaids or escrow (homeowners insurance, property taxes, mortgage insurance).  

Mortgage lenders have to make money, and they do so mainly from loan interest (if they keep the loan), profit from selling the loan (if they do so), and upfront fees, or a combination of all of these.  Some lenders can be flexible in how they make money.  They may be willing to make less money with upfront fees in exchange for making more money on interest charges, or vice versa.  This is why the same lender can offer a range of interest rates on the same loan.  You can get a loan with zero upfront cost for a slightly higher interest rate, a loan with standard upfront cost with a standard interest rate, or a loan with high upfront costs (paying points) in exchange for a slightly lower interest rate.

You have to do the math to know which of these deals is better for you, but very often, the zero cost loan may be the way to go.  Here’s one example:  

  • I received two quotes from the same lender on the same day, one for a standard loan, and one for a zero cost loan.  
  • The standard loan had an interest rate of 0.125% (⅛ %) lower than the zero cost loan, but cost $2,012 in upfront closing costs (including lender and third party fees, excluding prepaids and escrow). 
  • The standard loan with the lower interest rate would have a monthly payment $24.81 cheaper than the zero cost loan.  
  • It will take 81 months (6.75 years!) of lower monthly payments to equal the savings of having zero cost at closing.  ($2,012 / $24.81/month = 81 months).  This ignores the time value of money, see the below.  
  • If you hold the loan long enough (more than 81 months), the lower interest rate would save you money eventually.  After 30 years of payments, the lower interest rate would save you $6,919.60 ([$24.81 * 12 * 30] – $2,012 = $6,919.60).  

Doesn’t the example above tell you to take the lower interest rate to save almost $7,000 over 30 years??? Maybe, maybe not.

Here’s why saving $2,012 upfront may make more sense than saving $6,919 over 30 years:

  • You may not have $2K laying around to put into your refinance, or you may want to use that $2K for something fun or important instead.
  • If you terminate the loan for any reason (sell your house, pay off the loan, refinance the loan again) in less than 6.75 years, the lower interest rate loan will cost you money vs. the zero cost loan.
  • Mortgage interest rates are volatile.  You could refinance today, rates could drop another 1% in 6 months, and you might want to refinance again!  Sounds crazy, but I have done this exact thing, refinancing my house twice within a 1 year period.  If you pay the upfront costs, that’s money down the drain.
  • Considering the time value of money, the zero cost loan could still save you money over 30 years.  If you invest that $2,012 up front savings, assuming a 5% rate of return, it will grow into $8,696 after 30 years!  ($2,012 * 1.05 ^30 = $8,696)

Volatility of Mortgage Rates

I mentioned above that mortgage rates may change DAILY.  In fact, they may change multiple times per day.

It’s a bit complicated, but mortgage costs are primarily driven by the investment market for a particular type of bond called mortgage backed securities (MBS).  Most lenders don’t actually hold most of their loans.  They sell the loans to recoup the money, so they can make more loans.  

The interest rate of the loan affects how much the bank can sell it for.  An investor will pay the bank more than the loan amount for the privilege of collecting interest on that loan.  For example, an investor might pay $305K to the mortgage lender to take over a $300K loan, so they can collect X% interest on that loan for 30 years.  So assuming lenders actually sell most of their loans, they actually make money on the fees they charge you, plus the profit they get when they sell the loan.  If they set the loan interest rate higher, they can sell the loan for more money, and they can charge you less fees upfront because they are making their money elsewhere.  If they give you a lower interest rate, they have to charge you more upfront.

While individual investors or investment firms may buy loans directly, many loans are sold to Fannie Mae and Freddie Mac (mortgage companies backed by the Federal government), who then package the loans together into mortgage backed securities and sell them to investors, to spread out the risk of people defaulting on their loans.

The price of mortgage backed securities moves up and down constantly, like any other market traded investment (stocks, other bonds, etc.).  As the price of mortgage backed securities varies, mortgage lenders adjust their interest rates and fees to 1) ensure they still make money on your loan, and 2) have competitive enough pricing compared to other lenders that you actually want to get a loan with them.

The lowest cost lenders don’t make much money per loan (but they sell a lot of them), so they have to adjust their rates and fees frequently to keep up with the market.  If a lender doesn’t change their rates often, they are likely a more expensive lender.  They can keep their rates higher and more steady, knowing that they will always make money despite the daily volatility of the market.

Here’s a very detailed explanation of the MBS market.

Terms

Before you get a mortgage, make sure you understand the terms of the loan.  A mortgage is a contract, and you will sign on the dotted line many, many times during closing.  Make sure you know what you are signing!  Here are a few things to look out for:

Fixed rate vs. adjustable rate:  

Most people in most situations should get a fixed interest rate for a predictable payment through the life of the loan.  The interest rate (and payment) on an adjustable rate mortgage (ARM)  may go up over a set period of time, or you could owe some sort of balloon payment down the road.  This is one of the reasons many folks lost their house back in 2008.  The only good reason I’ve ever heard of for getting an ARM is for investors that plan on flipping a house in a short period of time.

Primary mortgage insurance (PMI):  Banks typically want you to put 20% down (or have 20% equity) to protect their investment.  If you default on your loan, and the house gets sold at auction, it might sell for less than the full balance of the loan, and the bank would take a loss.  The 20% down payment protects the bank from a loss in this situation.  

If you get a conventional mortgage, but don’t have the cash to put 20% down, the bank makes you get PMI.  PMI pays the bank in the event of a loan default and a loss on the loan.  YOU pay the cost of PMI, every month, until you have 20% equity in your home.  

You can get rid of PMI by paying down the loan until you have 20% equity, refinancing the loan when you have 20% equity because of rising home prices, or having an appraisal done on the home after X years (X is set by the terms of your loan) to prove you have 20% equity.  

If you don’t have the money for a 20% down payment, but want to own a home, PMI is an OK option, but do your best to get rid of it as soon as possible.  Refinancing to get rid of PMI is really only a valid option if the new loan’s interest rate is the same or lower than your current loan.  If the new loan’s rate is higher, you’ll pay more in interest, and could cancel out the savings of not having PMI.

Conventional vs. FHA vs. VA vs. …

A conventional loan is not insured by any government agency.  Therefore, risk of loan default lies with the lender (or whoever they sell the loan to), and terms of the loan are set by the lender (subject to any applicable federal regulations).  A conventional loan is likely the best choice for most people with decent credit and some money for a down payment (or equity for a refinance).

An FHA loan is insured by the Federal Housing Administration.  Since the risk of default is taken on by the government instead of the lender, these loans have different terms available, and are available to borrowers with less money for a down payment (as low as 3.5%) and/or lower credit scores.  However, FHA loans have disadvantages vs. a conventional loan.  If you put down less than 10%, FHA mortgage insurance premiums last for the life of the loan, instead of going away when you have 20% equity (but you can still refinance later to get rid of it).  FHA loans also require a strict appraisal of your home, where you might get dinged for having unacceptable hand rails on your stairs, or other items that wouldn’t affect a conventional mortgage or appraisal process.

A VA loan is guaranteed by the US Department of Veterans Affairs.  Similar to an FHA loan, the terms are set by the government, but VA loans are only for active duty military members and veterans.  Loans can be had with zero down payment, good interest rates, and no mortgage insurance is required, but you will be charged a VA funding fee, ranging from 1.4% to 3.6% of the loan, and you’ll need a special home inspection.

A USDA loan is guaranteed by the US Department of Agriculture.  It is for low-income buyers in rural areas (population less than 35,000).  If you qualify, these loans have a great interest rate, and no down payment is required.  More info here:  USDA Loan Program.

More info on the different types of loans can be found on NOLO’s website.  Regardless of the type of loan you want, shop around for the best rate, cost, and terms!

Customer Service

It only takes a month or so to obtain and close on a mortgage refinance, a very short period of time compared to the 15 or 30 years you might have the loan.   Therefore, I’m willing to go with an online lender with less personalized service than a local lender may give, if it means I’ll save thousands of dollars.  That said, any lender needs to be polite, professional, and competent.

I’ve had no major issues with any of the three online mortgage lenders I’ve used in the past (Aurora Financial, Cardinal Financial, and Pike Creek Mortgage).  All were quick to give me a formal quote, had an easy process to submit required documentation online, and were responsive by email and phone as needed throughout the process.  However, I was an easy customer.  I already knew what type of mortgage I wanted before I contacted them, and I had an easy to approve credit and financial profile.  One of the lenders was a bit slow in dealing with one snag prior to closing, and I had to pester them a few times to get it resolved prior to my rate lock expiring.

If you need more hand-holding during your mortgage application and closing process, you might want to use your local lender with a real office who gives more personalized attention.  If you are an informed customer, and if you have read this far you probably are, you will do just fine with an online lender.

Recommendation

Don’t overpay on your mortgage.  For most normal folks, its the biggest financial commitment you’ll ever make.  

Shop around to get a good deal.  Arm yourself with good info from Mortgage News Daily.  Find a low cost lender on Zillow Mortgage.  

Many of the links on this site are “affiliate” links.  If you use the links provided to purchase the recommended items, or to navigate to the web retailer site to purchase anything at all, I may receive a small commission.  These commissions will help me expand this site and provide you with additional recommendations. As an Amazon Associate I earn from qualifying purchases.  Thank you!

Dork It Up Yourself:

Here’s a good mortgage payment calculator without a bunch of ads.

Here’s a good mortgage payoff calculator.

More info on the different types of loans can be found on NOLO’s website.

Here’s a very detailed explanation of the MBS market.

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