Several readers have asked about "Free" or "No-Cost" loans. Anyone who has listened to the radio or read a newspaper has probably heard advertisements offering to refinance your home with "No" closing costs. Since we all know that nothing is truly free in this world when it comes to getting a loan, one wonders how loan companies get away with advertising it. The truth is quite simple. There is no such thing as a "Free" loan. However, there is a way to get a loan without paying any closing costs. To see how this is done, we need to review the concept of points.

As you may remember from previous articles, a point is equal to one percent of the loan amount. Generally, the more points paid at closing the lower the interest rate over the life of the loan. On a fixed rate loan, you usually get an 0.25 percent lower rate for every additional point paid at closing. What most people are not aware of is that this trade-off also applies in the other direction. In other words, you can accept an increase in interest rate over the life of the loan and the lender will give back points at closing. How many points you need back to over your closing costs depends on the size loan. Since closing costs are generally fixed, a larger loan requires fewer points back to cover closing costs. For most people, increase in an interest rate of .25 percent to .5 percent, will result in a "Free" loan. It pays to shop, since any lender can originate this type of loan. For example, if you are currently being quoted ab increase of 1 to 1.5% for a "No Closing Cost" loan, you are most likely being gouged.

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