Similar to other refinance programs, the HARP loan program also provides a No Cost Refinance option where there are truly no closing costs as part of the refinance.
Unfortunately there is no free lunch with a HARP No Cost Refinance just like any other type of loan.
Even when the borrower doesn’t pay closing costs, there are still indeed real costs as part of the refinance process which need to be paid by someone. In the case of a No Cost refinance, the closing costs are paid by the mortgage company. HARP refinance lenders generate the money needed by charging a higher mortgage rate than would be provided had the borrower paid the closing costs themselves.
In general, the premium in rate for a HARP No Cost Refi runs about 0.250% – 0.375% higher for a fixed rate loan.
A lot of borrowers question why they would ever refinance at a higher rate than possible on a HARP loan, even if it meant that they had to pay closing costs. This however ignores the amount of time that it takes to recoup the upfront closing costs through the monthly savings provided by the lower rate – otherwise known as the break-even point.
The break-even point at which the borrower truly saves more by paying closing costs versus a HARP No Cost Refinance is computed simply by taking the difference between the monthly mortgage payments of each option and dividing that amount into the closing costs.
For example, let’s assume that the rate for a 30-year fixed rate mortgage with a loan amount of $300,000 at a 100% loan-to-value ratio is 4.375% if the borrower pays closing costs of $2500. Further let’s assume that the rate for that same loan as a No Cost Refi is 4.625%.
The monthly mortgage payment at 4.375% is $1497.86 whereas it is $1542.42 at a rate of 4.625% which is a difference of $44.56 per month.
Dividing the difference of $44.56 into the closing costs of $2500 results in a break-even period of slightly more than 51 months or 4.675 years. This is the length of time before the total amount of monthly savings exceeds paying the upfront closing costs on a HARP loan.
Whether that is an acceptable time or not is a personal decision which needs to be evaluated in the context of how long the property is to be kept and if it is anticipated that there may be another opportunity to refinance to an even lower rate in the future.