Is it possible to Cash Out Refinance without closing costs?

[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?

[Zack Karp]

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!