The Two Types of No Closing Cost Refinance Loans
It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees. These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have.
Refinancing fees vary from state to state and lender to lender. These costs may include the following:
- Application fee ($75 to $300)
- Loan origination fee (0% to 1.5% of loan principal)
- Points (0% to 3%)
- Appraisal fee ($300 to $700)
- Inspection fee ($175 to $350)
- Attorney review/closing fee ($500 to $1,000)
- Homeowner's insurance policy ($300 to $1,000)
- FHA, RDS, or VA fees or PMI (0.5% to 2%)
- Title insurance ($700 to $900)
- Survey fee ($150 to $400)
- Prepayment penalty (1 to 6 month's interest payments)
‘No Closing Cost’ Refinancing
Lenders often define “no-cost” refinancing differently, so be sure to ask about the specific terms offered by each lender. Basically, there are two ways to avoid paying up-front fees.
The first is an arrangement in which the lender covers the closing costs, but charges you a higher interest rate. You will pay this higher rate for the life of the loan. Ask the lender or broker for a comparison of the up-front costs, principal, rate, and payments with and without this rate trade-off.
The second is when refinancing fees are included in (“rolled into” or “financed into”) your loan — they become part of the principal you borrow. Although you will not be required to pay cash up front, you will instead end up repaying these fees with interest over the life of your loan. When lenders offer a “no-cost” loan, they may include a prepayment penalty to discourage you from refinancing within the first few years of the loan. Ask the lender offering a no-cost loan to explain all the fees and penalties before you agree to these terms.
Is No-Closing-Cost Refinancing a Good Deal?
This type of mortgage is best for people who plan to sell or refinance in a few years. If interest rates are steadily falling, then you can move from no cost refinance to no cost refinance without spending a dime on closing costs. If you want to stay in your home and never refinance again, then the higher interest rate will cost you more over the life of the loan.
For people who plan to stay in their homes for more than five years and do not plan to refinance again, the best bet is to save up the money to cover the closing costs and fees on your mortgage and get a lower interest rate. It does not seem like a lot, but the difference between 5.25% and 5.5% can really add up. On a $100,000 loan paid over 30 years, that totals $6,000 in added interest expense.
If you don’t plan to sell or refinance in three to five years and your closing costs are less than the additional interest, more than likely they will be, then it is worth it to pay the closing costs up front. Even factoring in your tax deduction, paying the closing costs would still save you money over the long-term. The higher your mortgage balance, the more that extra quarter point will cost you.
Easiest Way to Get an Answer
Many mortgage originators offer no-closing-cost refinance loans. What to do next? Try the Bills.com Mortgage Calculator or get a Bills.com Quick Quote and find great mortgage lenders ready with rate quotes on the best loans for your situation. You can also read and review a related article on a no closing cost mortgage refinance lender.