A no cost mortgage rate in California is when your lender covers all the closing costs (lender, third party and recording costs) associated with your mortgage in exchange for a higher interest rate.
All things being equal; an interest rate without any closing costs is higher than an interest rate that has closing costs. It’s easier to obtain a no cost interest rate on a refinance than it is on a purchase.
Have you been looking for that seemingly elusive “no-cost” mortgage rates in California? And I mean the true no-cost mortgage loan where all lender third party and recording fees are covered.
They’re hard to find and not all no-cost mortgage rates are the same due to the fact that lenders have different definitions. Surprisingly many “no-cost rates” close with closing costs. That’s why it’s so important to find a top-rated lender when searching for a no-cost interest rate mortgage.
Understand The Facts About No Cost Mortgage Rates In California
It’s important that you understand what a no cost rate mortgage means.
A no-cost mortgage rate means you the borrower are not being charged directly for the costs as the lender issues a credit to cover the costs being charged. To obtain the lender credit you will have to take a higher interest rate to cover those fixed costs (which generally include underwriting, appraisal, title, escrow, and recording). You should not think that a no-cost loan means everyone is working for free. No cost rates in California simply means you’re accepting a higher rate to avoid paying directly for costs associated with closing your loan.
It usually works out where the rate increase, to obtain the no cost mortgage, is only slightly higher than the rate in which thousands of dollars in fees are charged.
A Zero Cost Mortgage Rate Example:
Here is a basic example of how a zero cost mortgage rate works. Let’s say you are trying to refinance your home and here is your loan application profile:
- Home value – $400,000
- Loan amount – $300,000
- Debt to income ratio – 38%
- Credit score – 700
- You’re looking for a 30 year fixed interest rate
A quote with costs might look something like this:
- Interest Rate: 4.00%
- Payment: $1,432.25
- Points: 1 point ($3,000)
- Lender fees: $1,186.00
- Third party fees: $1,761.00
- Recording: $350.00
For that exact same here is an example of a no cost interest rate:
- Interest Rate: 4.375%
- Payment: $1,497.86
- Points: 0
- Lender fees: $0.00
- Third party fees: $0.00
- Recording: $0.00
The first thing to know is that this is a hypothetical example and not a real-world quote. Sometimes the interest rate is only a .25% higher or at times it’s a .50% higher. It all depends on the market.
Second, this is based on the exact same loan amount ($300,000) which means if you went with the first option you would have to come out of pocket for the closing costs. If not and you wanted to roll them into the loan (meaning increase the loan amount) your payment would be $1,470.44.
In that scenario, in which you added the closing costs to the loan, the payment difference is $27.42.
So if you went with the zero cost rate mortgage rate option you would be paying $27.42 more per month or almost $330 more per year. For most people the slight increase in monthly payment makes a lot more sense especially those who might move or possibly refinance in the next five to seven years.
Different Lenders Have Different Definitions:
Many lenders claim to have a no-cost cost mortgage rates in California however when you move to close there are fees. Ugh! What happens is the loan officer is not being up front; and not clarifying if the no-cost mortgage means not a single penny in fee or if it means something else.
With some lenders a “no-cost” rate means the lender is not charging an origination fee and/or an underwriting fee but you’re still paying third party fees. Other lenders claim they offer a “no-cost” rate however they still charge a processing fee and third party fees.
That does not happen at JB Mortgage Capital, Inc. When we say no-cost we mean not a single penny for lender underwriting/processing, points, or third party fees (as mentioned to cover these fees you are accepting a higher rate) are being charged directly to you.
Who Qualifies For Them And What Lenders Offer Them?
Unfortunately not everyone qualifies for a true no cost interest rate. As mentioned it’s easier to obtain a no cost rate on a refinance. The reason is the overall fee structure is sifnificantly less on a refinance which makes it easier for the lender credit to cover all the costs associated with the transaction.
Potential roadblocks to obtaining a no-cost loan are:
- A low loan amount
- Non-owner occupied properties
- Transactions that include a subordination
- Multi-unit properties
- High LTV cash out loans
Also loan amounts below 200k can present some obstacles as well. The “sweet spot” for a no cost mortgage rate is excellent credit, 40% equity, primary residence, no cash out and a loan amount above 280k.
There is no exact list of lenders that offer no-cost mortgage rates in California so you’ll have to do some research online (or use us!). When calling (or emailing) around for your quotes just ask the Loan Officer if his or her loan programs offer a zero cost mortgage rate option.
If the answer is “yes” ask the Loan Officer to clearly define what a no-cost interest rate is with them; does it mean that all closing costs are covered (every single penny)?
Are All Zero Cost Mortgage Rates In California The Same?
They are not. Some lenders quote zero costs rates that still have third-party fees and other lenders still have lender fees being charged directly to the borrower. Asking the right questions to the Loan Officer and ensure a clear understanding of what is being offered to you.