No Cost Refi - If you are a home owner and are considering refinancing you current mortgage you have many different loan programs to select from. One program that has been gaining popularity recently is the no cost refi. The no cost refi program has no closing costs, all the closing costs and third party fees are paid by the lender. A no cost refi has many advantages and disadvantages associated with it.
Most of the large corporate lenders advertise the "No Cost Refi" in a way that appears to save the borrower money. The fact is that over the life of the mortgage the higher interest rate of a No Cost Refi will cost you substantially more money. You are better off paying closing costs out of pocket or rolling them into the loan in return for a lower mortgage interest rate.
While a no cost refi may sound like a dream come true, talk to a mortgage professional about the detailed costs of originating a new loan or refinance. There is no such thing as a free lunch, and sadly, there is no such thing as a free refinance either. How you choose to pay may dramatically impact how much you spend on your mortgage over the long run.
Whether a no-cost refi is the way to go depends on a couple of factors. ... If you're planning on moving fairly soon, the no-cost refi might well make sense.
A good alternatives to a no cost refi would be a low cost refi, many banks offer loans with only $500 closing costs. The $500 covers the small 3rd party fees such as appraisal and recording fee's. Many banks that do this will put a pre pay penalty on your loan to insure that they do not loose money on your transaction.
When you hear the term "NO Cost Refi" or "No upfront fees", ask yourself how are they going to make their money. The answer is in the form of a higher interest rate. You may save a few thousand dollars upfront but you will be paying tens of thousands of dollars in the long run. These loans are great for borrowers without the ability to pay the upfront fees but borrowers who can afford them should be leary about using them.
A no-cost refi can be helpful in situations where the possibility of moving in the near future exists or you not exactly sure. You can use it to save money in the short-term and until you can confirm your exact situation, you can refinance later for a long-term loan.
One way to find out which method is best for you is to find your breakeven point. The breakeven point is the number of months it would take to recoup your closing costs based on your savings in monthly payment. For example if you incur 5,000 in closing costs which result in a $250/month savings, it would take 20 months to break even of the closing costs.
Typically, a no cost refi comes with a higher interest rate.
One of the main factors in determining whether a no cost refi is the "right" way to go is to look into your financial situation and see what your future goals are. A no cost refi is a good idea if you are considering moving in a few years or you know that you will need to refinance in a few years. The reason being is that by obtaining a no cost refi you are going to pay a higher interest rate than you would have by just simply paying for the closing costs or rolling them into your loan. Most of the time the closing costs could have been paid for within a couple of years with a lower rate loan and therefore if you keep the no cost loan more than a couple of years you will be stuck with that higher interest rate for the life of the loan or long after you would have paid for those closing costs. This will cause you to pay much more in interest over the life of the loan. After discussing your goals and needs with your mortgage professional he or she should be able to provide you with their opinion on which type of refinance will be best for you, "no cost" or "with cost".