Some years ago, my mortgage lender contact me about refinancing my home at zero cost. The rate wasn't the best, but good enough and much better than my current one. That coupled with the zero cost, settled it in my mind.
I was fully informed that it was actually a HELOC for the same value as my mortgage balance and that, for all purposes, it would be equivalent to a new mortgage, including tax-wise. Or is it?
TIA
Basically the same. What matters is what position the loan is in. Your H/E loan is in first place, so it acts the same as a first mortgage.
BTW, I am skeptical about the zero cost. All loans have costs and fees associated with them. What you likely meant is "no out of pocket payments". If you look at the closing statement, you will probably find that the fees were rolled into the new loan, and now you are paying for the fees over 30 years rather than paying them up front and being able to deduct them from your taxes in one shot. Often times when fees are rolled into the new loan, the borrower doesn't notice them, which allows the lenders to put in all kinds of junk fees and charge outlandish amounts for the fees. That no cost deal was probably the most expensive loan you could have found. Always think total cost, and not just cost per month.
-john-
You are right to be skeptical (as am I). Its the "no such thing as a free lunch principle". Even if there really were no charges rolled into the loan, the bank recoups the cost by charging higher interest than they would have otherwise. And as John said, I am willing to bet the charges were there anyway, just buried.
It's been a few years, but I pretty sure that I scoured the agreement for hidden fees. I'll check it again, but can you provide any tips about how they could show up?
Indeed, I got a rate about 0.5% higher than I could otherwise. Unfortunately, that rate cannot be beaten nowadays...
Thanks John and Kastnna for your replies.
I don't recall if you posted any of the terms. So, lets say that this was a true H/E loan from a real bank, it was for $50K, and you got a rate of 6.5% fixed. Your total payments over 15 years would be $78K. At 6%, the better rate with closing costs, you would have paid $75K. The net is that your "no cost" loan cost $2450. Closing costs would have been things like the appraisal, recording, maybe a tax fee, etc. No more than $500 at the outside. So, the net cost of the no cost loan was $2000. I don't know about where you live, but where I live, $2K will pay for a lot of trips to Dairy Queen.
-john-
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