Is it possible to Cash Out Refinance without closing costs?

16 Replies

I live in Texas and am working  on using the equity in my home to get a loan and construct a garage apartment to rent out and try my hand at land-lording. 

I understand that most banks like to use this formula: (Value of home - amount owed) .8

I have enough equity in the home to where 80% of the difference in value minus balance is sufficient to fund my construction project. 

All 3 banks I have approached have given me the same type of offer:

1. We'll offer you a cash out refinance where you pay us ~$4000 in closing costs and we'll refinance your entire loan and offer you a good interest rate 3.875%

2. We'll offer you a Home Equity Loan with 3% closing costs (on the total amount of  your loan) and a not so good interest rate of 5.49%

I'm very inexperienced in the loan industry.  Is there a way to do a cash out refinance without having to pay the hefty closing costs?

Originally posted by @Victor Mondragon :

I live in Texas and am working  on using the equity in my home to get a loan and construct a garage apartment to rent out and try my hand at land-lording. 

I understand that most banks like to use this formula: (Value of home - amount owed) .8

I have enough equity in the home to where 80% of the difference in value minus balance is sufficient to fund my construction project. 

All 3 banks I have approached have given me the same type of offer:

1. We'll offer you a cash out refinance where you pay us ~$4000 in closing costs and we'll refinance your entire loan and offer you a good interest rate 3.875%

2. We'll offer you a Home Equity Loan with 3% closing costs (on the total amount of  your loan) and a not so good interest rate of 5.49%

I'm very inexperienced in the loan industry.  Is there a way to do a cash out refinance without having to pay the hefty closing costs?

Keep in mind that the lenders make some of their money off the closing costs. It is very unlikely you will find a loan that does not have them. I believe that the HELOC has significantly lower closing costs that a full refinance with many lenders.

Here in Florida there is a local company RP Funding that does zero closing cost mortgages and refis and they keep them in house, earning their money on interest and not closing costs. I'm not sure if they lend to other states, but if not, there may be someone similar. I will be doing an FHA or traditional cash out refi on my primary with them early next year (there is still the up front PMI on fha, but no closing costs) to wrap my first, second, and some divorce legal debt together and then doing a rate and term traditional refi several months later to lock in a lower rate than a cash out would have now. The first refi will clean up my credit report and raise my fico score enough qualify for the best rates on a rate and term after. That option wouldn't make sense with $8k in closing costs added to the two refis. I'm almost positive they advertise for investment financing as well.

Just to be clear, your formula is a bit off for a heloc.
Typically they will lend you 80% of value, then subtract your current mtg balance(not 80% of the difference).....this is Not 80% of your equity.

Originally posted by @Wayne Brooks :

Just to be clear, your formula is a bit off for a heloc.
Typically they will lend you 80% of value, then subtract your current mtg balance(not 80% of the difference).....this is Not 80% of your equity.

 Ah gotcha. 

Thank you for clearing that up. 

@Victor Mondragon   You almost always have the option of taking a slightly higher rate and getting a lender credit to cover closing costs.

Instead of paying points to get a lower rate, you get a higher rate and the lender essentially gives you the points.

If you are being quoted 3.875% with no points, perhaps a rate of 4.125% will give you 1 point back as a credit.  If your loan amount is $400,000, 1 point would be 1% of your loan amount, or $4000.

Originally posted by @Stephanie Irto :

@Victor Mondragon  You almost always have the option of taking a slightly higher rate and getting a lender credit to cover closing costs.

Instead of paying points to get a lower rate, you get a higher rate and the lender essentially gives you the points.

If you are being quoted 3.875% with no points, perhaps a rate of 4.125% will give you 1 point back as a credit.  If your loan amount is $400,000, 1 point would be 1% of your loan amount, or $4000.

 This is excellent information!  I will definitely ask my lender about getting a point back as a credit in exchange for a slightly higher rate. 

Great advice Stephanie thanks!

This is one of my favorite questions to answer.

A great analogy comes from a Chris Rock song, "No matter what a stripper tells you, there is no sex in the champagne room."

No matter what a lender tells you, there is no such thing as no closing costs.

The question is, who pays the closing costs.

Traditionally, on a par rate loan, you will pay lender fees and title fees for a refinance.  The amount varies by lender, and by state.

As a borrower, you can ABSOLUTELY have a loan where you pay zero closing costs.  The lender gives you a slightly higher rate, and THEY pay those costs for you.

This strategy is a great short-term strategy, because most times it takes about 5-7 years +/- to break even on paying those costs.

Which is why for many real estate investors, especially flippers, this is a better strategy, and one that I educate all my clients about.

Everyone is so caught up in the lowest rate, when in fact overall cost-effectiveness and knowing the long-term plan are more important than rate.  And it varies in every situation.  Sometimes it's smarter to pay those closing costs, and even pay points for a lower rate, especially in a buy and hold situation and especially in a rising rate environment.

The most important thing is to align yourself with a rockstar Loan Officer, that works at a lender that doesn't gauge you in fees, that is looking out for YOUR best interests and educating you on all of your options, so that you can make the best decision for your situation.

Hope that helps!

@Victor Mondragon yeah, unfortunately there is always some type of costs involved. So either you pay the costs yourself and get less money out of the home, or you pay it in the rate and pay a lot more money to the bank in payments. Either way you are going to have to pay for it somehow. HELOCs do have lower closing costs but the rate is adjustable and it changes to a different product after 10 years. Every investor pays costs and the more important item to understand here is how you will be using your money. So if you are using the money to do flips...then a HELOC might be more important to have...even if the rate is adjustable. You only use it when you need it (so you only pay interest when you use the money) and when you sell the home you pay it back and use it again. But if you are buying and holding more properties (or using the money for more long term items) then having a stable, forecastable interest rate is more important. Let us know if you need more information. Thanks!

Thank you @Zack Karp and @Andrew Postell for your insight. 

I found out that Quicken Loans was having a "cyber monday deal" that offered identical interest and terms as the credit union deal I was working on, but offered closing costs that were about $2k lower.  

The loan officer also offered lower points for an identical closing cost.  I took the half price closing costs and am well on my way to my first crack at land lording! 

@Victor Mondragon their "cyber monday deal" is just a 0.5% discount point credit, it's nothing earth shattering.  Just beware that rockets explode....hopefully you didn't get the guy working at Jiffy Lube last year.

Best of luck! :)

@Zack Karp I was pretty skeptical when I called in, but they came in lower than the deal I was about to take.  The guy I worked with has been there 9 years.  

I didn't take the points, so I got lender credit towards my closing costs worth a little over 2k.  

I'll post another update after closing. 

Victor,

Happy to hear you found the most cost effective option for what you’re looking to accomplish. Others have already thoroughly covered closing costs on a refinance. On a refinance, depending on the equity you have in the home, the refi “could” be no cost... As in no out of pocket. On the Loan Estimate and on your Closing Disclosures, it will be a different story.

Best of luck to you on the new purchase!

-Tony

Ask them for a line of credit instead

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