Refinance loans with “no closing costs” may sound like a really great deal at first. I mean, who wouldn’t want a deal with no costs? The truth is, when it comes to refinancing your mortgage, the ‘no closing cost’ deal may become far less appealing when you learn how those fees are replaced with a higher mortgage rate and payment.You see, there are always costs when it comes to closing a mortgage, and, whether now or later, somebody is going to pay them. And unless you’re on the receiving end of some sort of miracle … it’s not going to be the lender paying those costs.
Today’s mortgage loan closing costs are real live costs for real live services and mandatory fees related to your financing. These costs might include an appraisal fees, the cost of your credit report, title searches, title insurance, mortgage insurance, recording fees to the county, your lender’s origination fee or points, escrow insurance, government fees, taxes, the loan guarantee cost, and of course somebody has to get paid to process the mountains of actual and digital paperwork it takes to originate a home loan.
No Closing Costs … No Kidding?
Yes, there are many lenders who offer and even promote ‘no closing cost’ or ‘no cost refinancing’ but the truth of the matter is that these costs are just pushed on down the road. The lender can recoup these costs in one of two ways:
- By adding these costs to your new mortgage balance.
- Charging a slightly higher interest rate on your new mortgage.
With today’s low interest rates, your monthly ‘no closing cost’ payment is likely to come in less than you are presently paying, which might make it look great at first glance. But you should always compare the new payment to what you would make if you paid all your closing costs up front.
That’s not to say that there is never a good time to consider a no-closing cost refinance. If interest rates are falling and you plan to refinance again, the small increase in your monthly payment won’t have much time to add up. Likewise if you don’t plan to keep the loan or the property for very long, a no-closing cost refinance can save you money. Also, if you need cash to renovate your home you may find that the no-closing cost refinance is less expensive than taking out a second mortgage or home equity loan.
In any event, the decision to refinance and whether to pay closing costs now or later is really a matter of knowing interest rates and doing the math.
No-Closing Cost Scenarios:
Consider these three examples for a 30-year $200,000 mortgage with $5000 in closing costs:
- Closing cost paid up front, interest rate 4.25%, payment $984.
- Closing cost added to mortgage balance, interest rate 4.25%, payment $1008.
- Closing cost waived as ‘lender credit’, interest rate 4.75%, payment $1043.
It would take seventeen years before the increase in payment #2 would equal the $5000 closing costs yet payment #3 would exceed them in year seven.
Whenever considering a refinance, it’s worth the time to thoroughly research your options. Be aware of the differences in interest rates for the various programs and features made available to you. Though the differences may seem small and insignificant now, they can add up to significant savings or significant waste over time. With interest rates hovering near historic lows, don’t stop at ‘good enough’ just by lowering your interest rate. Look for the best overall refinancing option that both meets your needs and saves you money.
“No-Closing Cost” Refinance Programs
Now that we’ve established the fine print of home refinance with no closing costs, we can take a look at the mortgage programs that do allow closing costs to be rolled into the new loan and don’t require the applicant to pay any cash up front.
HARP is successful a government refinance program available in several different forms to allow underwater borrowers to lower their interest rate.
The FHA Rate-Term Refinance has been a popular options for decades to help borrowers with little equity in their home and imperfect credit obtain a better rate.
FHA Streamline Refinance is a great options for borrowers that already have an FHA mortgage. The Streamline process means less hassle and paperwork to get a lower rate.