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| H o w C a n W e A s s i s t Y o u T o d a y ? |
Does a Zero Fee Loan Really Exist?
Yes. But it may not be as good as it sounds. Let's take a look at what this concept is all about and
you can decide for yourself.
What is a Zero Fee Loan?
The way this works is based on something called "premium" pricing. The basic idea is that you
accept a higher interest rate in exchange for cash up front, which is then applied to cover your
costs at closing. This is similar to the way you might pay points to a lender in order to buy a lower
rate, only in reverse: Instead of you paying the lender points for a lower rate, the lender pays you
"points" to accept a higher rate.
But higher than what? Whether a particular rate costs points or pays you points is determined by
where the rate is in relation to the day's Zero Point Rate Quote:
Below the Zero Point Rate Quote- Also referred to as Discounted Pricing, this is where you pay the
lender and get a "below market" quote. How far below the market depends on how many points
you pay. The more you pay, the deeper the discount in rate.
Above the Zero Point Rate Quote- These rates are known as Premium Pricing. This is where the
lender pays you to take a rate that is above the market, or at a premium. How much the lender will
pay depends on how much higher the rate is above the market.
You can also think of this as negative points. For example, a 30-Year Fixed Rate schedule may
look like this:
In this example, the Loan Officer can offer you 5.75% with a cost of -1 point. In other words, a cost
of "negative one point" means the lender is paying you 1 point. Which on a $200,000 loan equates
to a $2,000 credit to you at closing. Typically it is applied right towards your closing costs, but if
there is any money left over, you get it.
What are the Benefits of a Zero Fee Loan?
The main benefit is that you have no out-of-pocket costs. As a result, if rates drop in the future you
could refinance again even for a small drop in rates. So if you refinanced on the zero fee loan to get
a rate of 5.75% and if the rates drop 1/2%, you can refinance again at 5.25% with no points and it
makes sense. On the other hand, if you refinanced by paying 1 point and got a rate of 5.25%, it
would not make sense to refinance again without a steeper drop in rates..
The zero fee loan eliminates the need to do a break-even analysis since there is no up-front or
closing cost expense that needs to be recovered. It also is a great way to take advantage of falling
rates.
What are the Disadvantages of a Zero Fee Loan?
The main disadvantage is that you are paying a higher rate than you would be paying if you had
either accepted a zero point rate with closing costs. (by the way- at AmeriStar we do recommend
taking Zero Point rates; we do not recommend paying points though) So the result could be if you
keep the Zero Fee loan long enough, you end up paying more than you would otherwise have,
since you are carrying a higher rate. In other words- If you plan to stay in the house for more than 3-
5 years, and if rates never drop for you to refinance, you wind up paying more money in the long
run. If, on the other hand, you plan to stay in a property for just 2-3 years, or rates fall and you
refinance again, these disadvantages disappear.
Whose Money Is It?
Since you are being paid "cash" up-front in exchange for a higher rate, it really is your own money
that will be paid in the future through higher payments. The reason is simple- the Zero Fee loan
has a higher rate (and a higher monthly payment) than a Zero Point loan.
Buyer Beware
If you do decide to get a Zero Fee loan, here are some things to look out for:
Update
Zero Fee loans may not be around forever. Lenders have discussed adding a pre-payment penalty
to such loans, and although few lenders have taken steps to implement such a measure, it seems
likely that they will in time. If so, in states where pre-payment penalties are not allowed, Zero Fee
loans would no longer be offered.
In Summary
Zero Fee loans are especially attractive when rates are declining or when you plan to sell your
house in less than 2-3 years. But the only REAL way to know if a Zero Fee loan is a good deal is to
work the numbers and make comparisons to the prevailing Zero Point loan using certain
assumptions regarding how long you expect to be in the home.
Your AmeriStar Loan Officer can help you decide which financing is best for you.
back to FAQ
Yes. But it may not be as good as it sounds. Let's take a look at what this concept is all about and
you can decide for yourself.
What is a Zero Fee Loan?
The way this works is based on something called "premium" pricing. The basic idea is that you
accept a higher interest rate in exchange for cash up front, which is then applied to cover your
costs at closing. This is similar to the way you might pay points to a lender in order to buy a lower
rate, only in reverse: Instead of you paying the lender points for a lower rate, the lender pays you
"points" to accept a higher rate.
But higher than what? Whether a particular rate costs points or pays you points is determined by
where the rate is in relation to the day's Zero Point Rate Quote:
Below the Zero Point Rate Quote- Also referred to as Discounted Pricing, this is where you pay the
lender and get a "below market" quote. How far below the market depends on how many points
you pay. The more you pay, the deeper the discount in rate.
Above the Zero Point Rate Quote- These rates are known as Premium Pricing. This is where the
lender pays you to take a rate that is above the market, or at a premium. How much the lender will
pay depends on how much higher the rate is above the market.
You can also think of this as negative points. For example, a 30-Year Fixed Rate schedule may
look like this:
- 5.00% with 2 points, or
5.25% with 1 point, or
5.50% with 0 points, or
5.75% with -1 point, or
6.00% with -2 points
In this example, the Loan Officer can offer you 5.75% with a cost of -1 point. In other words, a cost
of "negative one point" means the lender is paying you 1 point. Which on a $200,000 loan equates
to a $2,000 credit to you at closing. Typically it is applied right towards your closing costs, but if
there is any money left over, you get it.
What are the Benefits of a Zero Fee Loan?
The main benefit is that you have no out-of-pocket costs. As a result, if rates drop in the future you
could refinance again even for a small drop in rates. So if you refinanced on the zero fee loan to get
a rate of 5.75% and if the rates drop 1/2%, you can refinance again at 5.25% with no points and it
makes sense. On the other hand, if you refinanced by paying 1 point and got a rate of 5.25%, it
would not make sense to refinance again without a steeper drop in rates..
The zero fee loan eliminates the need to do a break-even analysis since there is no up-front or
closing cost expense that needs to be recovered. It also is a great way to take advantage of falling
rates.
What are the Disadvantages of a Zero Fee Loan?
The main disadvantage is that you are paying a higher rate than you would be paying if you had
either accepted a zero point rate with closing costs. (by the way- at AmeriStar we do recommend
taking Zero Point rates; we do not recommend paying points though) So the result could be if you
keep the Zero Fee loan long enough, you end up paying more than you would otherwise have,
since you are carrying a higher rate. In other words- If you plan to stay in the house for more than 3-
5 years, and if rates never drop for you to refinance, you wind up paying more money in the long
run. If, on the other hand, you plan to stay in a property for just 2-3 years, or rates fall and you
refinance again, these disadvantages disappear.
Whose Money Is It?
Since you are being paid "cash" up-front in exchange for a higher rate, it really is your own money
that will be paid in the future through higher payments. The reason is simple- the Zero Fee loan
has a higher rate (and a higher monthly payment) than a Zero Point loan.
Buyer Beware
If you do decide to get a Zero Fee loan, here are some things to look out for:
- Make sure that the lender actually pays for your closing costs at settlement from rebate
points, and NOT by increasing your loan amount. (You could roll-in some of the recurring
costs that are not actually associated with the refinance (such as taxes, insurance, and
interim interest; or just pay them out of pocket) - Restrictions and "catches": Many so-called "Zero Fee" lenders have high minimum loan
amounts, and upfront "lock-in" fees or "deposits" you have to pay. Although they say those
fees are "refundable" at closing under certain circumstances, once they have your money,
that can put you in a disadvantageous position,making it harder for you to switch lenders if
things don't work out..
Update
Zero Fee loans may not be around forever. Lenders have discussed adding a pre-payment penalty
to such loans, and although few lenders have taken steps to implement such a measure, it seems
likely that they will in time. If so, in states where pre-payment penalties are not allowed, Zero Fee
loans would no longer be offered.
In Summary
Zero Fee loans are especially attractive when rates are declining or when you plan to sell your
house in less than 2-3 years. But the only REAL way to know if a Zero Fee loan is a good deal is to
work the numbers and make comparisons to the prevailing Zero Point loan using certain
assumptions regarding how long you expect to be in the home.
Your AmeriStar Loan Officer can help you decide which financing is best for you.
back to FAQ
Pre-Apply.com is a service of AmeriStar Home Mortgage, Inc. Information is deemed reliable but not guaranteed,
and is subject to change at any time. Use of this site for informational purposes, and does not constitute a
commitment to lend. Equal Housing Lender. © 2007AmeriStar Home Mortgage, Inc.
and is subject to change at any time. Use of this site for informational purposes, and does not constitute a
commitment to lend. Equal Housing Lender. © 2007AmeriStar Home Mortgage, Inc.
or call toll-free 1.877.PRE.APPLY
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(1.877.773.2775)
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