Be Careful of a No Closing Cost Refinance
If you’re searching for ways to cut your monthly bills you may be interested in a no closing cost refinance for your home mortgage. Refinancing itself typically costs thousands of dollars up front just like the original mortgage did, and for some this might be out of their reach.
Just as a mortgage without any closing costs is very tempting, a no closing cost refinance can be just as alluring to those homeowners. However there is a difference between getting an original mortgage without closing costs and handling a refinancing that way, and these differences need to be considered carefully by the homeowner.
First, an original mortgage with no closing costs may simply mean that the seller is paying those costs, not that they don’t exist. There is just no such thing as a mortgage without closing costs, as these costs include fees for the appraisal, inspection, homeowner’s insurance, broker, and so on.
With a no closing cost refinance, there is no seller to cover those costs – you already own the home! In some cases those closing costs have simply been tacked onto the mortgage amount itself, so it’s not as if the buyer is not paying them; he or she is simply adding those costs to the debt itself.
This is typically how it happens with a no closing cost refinance. Those costs are still there but they’re simply added to the mortgage amount that is being refinanced. Why is this a consideration for homeowners looking to refinance?
For one thing, if you pay more points, or a percentage of the amount still due, when you close your refinanced mortgage you’re likely to get a lower rate overall. If you opt for a no closing cost refinance, you’re not only still paying those costs eventually but you’re probably getting a higher rate than you would otherwise.
Typically the entire point of refinancing is to get the lowest rate you can, but if you opt for a no closing cost refinance you might be defeating the entire purpose altogether.
You also need to consider why you want a no closing cost refinance. Adding those costs to your loan will simply eat away at any equity you may have built and might not actually help you with your mortgage amount overall. If your monthly payment is lowered this might help you immediately but also may mean that you’re not doing much to pay down the principal amount due on the mortgage itself.
Very often someone that opts for a no closing cost refinance is going to be paying on that mortgage for much longer than their original 30 years! Of course if you think you’re going to sell your home relatively quickly or don’t care about building equity then a no closing cost refinance might be an option for you. The best thing that any homeowner can do is discuss these things with the lender to find out all the details and options involved.
