A couple of weeks ago, I dispelled the myth of the no-closing cost refinance. Despite knowing the closing costs were built into a higher rate, Ben and I decided to refinance because we are still getting a lower rate than we currently have.

The process has been a lot easier and faster than getting the original mortgage. We have resubmitted paperwork, provided some e-signatures, and are now ready to close within two weeks of starting the process.

Yesterday, however, we got an email from our lender that I wasn’t expecting.  Even though we were told we would not be paying closing costs, we still have to bring over $7,000 to the closing.  This caught me by surprise even as a person that paid meticulous attention at our first closing and as someone who prides himself in knowing the numbers.

As the maxim states, the devil is in the details.

Prepaid Items are not Closing Costs

The $7000 that we have to pay actual comes from prepaid items that we have to make at closing.  These items include:

• The interest paid to our original lender for the previous month: Interest is paid a month behind, so by not making next month’s mortgage payment, we wouldn’t be paying the previous month’s accrued interest as required. Instead, we now have to bring that money to closing. We also have to pay interest for the seven days that it takes the new mortgage company to pay the old mortgage company. 
• 24 days of interest to the new lender: This first two months of the new loan, we will be living in the home and not paying the mortgage. At closing, we have to prepay the first month’s interest. The second month’s interest will be paid by our first mortgage payment.
• Setting up the new escrow: We pay our real estate taxes and insurance through an escrow account. As such, we have to fund that account for the remaining amount of real estate taxes and insurance for the current year. However, we do get the amount of money in our old escrow returned to us.

When our lender’s representative was referring to “no-closing costs,” she meant items like the origination charge (our lender’s fee), required services like the appraisal fee, credit reports and condo questionnaire, and the title services and lender’s title insurance. 

Since all of these fees are paid at closing, to me it’s a little deceptive to distinguish between closing costs and prepaid items. But I get the difference between the expenses and why we would have to pay one and not the other.

Thank God for Cash Reserves

Like I said above, this took me by surprise. In addition, we found this out four days before closing. Luckily Ben and I have the cash to pay it. Reason number 1,569,450 of why it’s key to have an emergency fund.

If we weren’t able to come up with the money, I can imagine it tanking the closing and negating all of the work we put into refinancing.  Our lender did give us an option of them covering the first month’s interest or refinancing for a higher amount. But at this point, it seems like giving the cash now will prevent us from spending more down the road.

No-Cost Refi isn’t that at all

I’m still glad we are refinancing and getting a lower interest rate, but I was right to be suspicious of the no-cost refinance.

The bottom line is that you have to know what you’re getting into. And with a no-cost refinance you will still have to come up with a substantial amount of cash for prepaid items.