no-closing cost refinancing

[George P.]

I was always under the impression that no-closing-cost-refi means they roll closing costs into the new loan. However a friend of mine claims he just refied his primary residence (loan around 420k) and the loan originator (not a portfolio lender) paid the closing costs. So the loan originator ate 3k+? Can it really be the case?

[Mitch Kronowit]

What Dion said. Mortgage brokers are often compensated with points paid by the LENDER, not the borrower. These "back end" points, as they are called, can be thought of as a reward or bonus for the broker selling a loan that makes the lender extra money, such as an interest rate slightly above market.

Consider this example:

Let's say the current going rate for a 30-year fixed rate mortgage is 4.5%, paying ZERO points. The lender's rate sheet may have a table that looks like so:

4.0% = -1 pts
4.25% = 0 pts
4.5% = 1 pts.
4.75% = 2 pts.
5.0% = 3 pts.

So, if the broker sells a mortgage at 4.5% (the market rate) and doesn't charge any points, the lender will still pay him 1 point, on the back-end, for his trouble. But look what happens when the rate sold is higher or lower.

If the broker sells below market rates, such as 4.25 or 4.0%, the lender is basically saying, "I hope you charged some points up front, because we ain't paying you squat!". Often times, this isn't a problem because many borrowers will "buy down" their interest rate so they can brag about what a great deal they got at this weekend's cocktail party. Of course, some wise-*** in the group (usually me) will ask, "How many POINTS did that rate cost you?!?!". Most borrowers don't like to answer that question. ;-)

Now, if the broker manages to sell a higher interest rate (convinces the borrowers their credit is crap, their income is pathetic, etc.), they can often offer several concessions to the borrower, such as pay their closing costs, because the lender is paying the broker a fat little bonus for selling the higher rate, which makes the note much more valuable on the secondary market (yeah, selling the mortgage to somebody else for a premium) or as a portfolio loan (the lender services the loan and enjoys all that extra interest).