No. of Recommendations: 3
Hi MM, Catherine (and fellow Fools;)

Catherine sez;
On a refi, I would never pay points to buy down a rate or pay costs out of my pocket. If I'm seeking a lower rate, I've got to get it with the lender paying for it--as well as hard closing costs--through rebate pricing. Then, when and if rates go down again, I'll just do it again and it never costs me anything. I bring no money to the closing table, nor does the principal balance increase. This has always been my philosophy but maybe other mortgage professionals have different ways of looking at this.

In general theory this sounds really good... especially the basic premise of getting something for nothing (even when we do understand that it's getting swept in there somewhere...) But there have become a few glitches in this practice overall;

1.) On smaller loans, the percentage rebate necessary to cover all the closing costs becomes prohibitively high. What's the point of a "nothing o/o pocket" loan if you don't really lower your real rates significantly?

2) Even on loans of sufficient size, the most competitive lenders have become wise to the tendency of "no cost refinancers" to feel free to "slide down the scale" and change their loans like changing their socks due to the "non-commitment, non-cost" nature of their refinancings. In order to cover the out-of-pocket costs that THEY incur, they've had to find a way to guarantee they'll get a minimum of interest payments so they're not losing money in the deals. Due to this, most competitive lenders have established "soft* prepayment penalties" that are required when the rebate pricing goes as high as a certain level (typically the levels necessary for zippo-out-of-pocket deals.)

As you can imagine, the soft prepayment penalties kinda put a damper on the "money for nothin'" party. (I'm still hearing about the "chix for free" in the song... don't know where THAT party is though...)

*Soft prepayment Penalties are better explained as "Fixed-Period Refinance restrictions." For a fuller explanation see;

Dave Donhoff
Mortgage Fool
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