You’re a responsible homeowner and you’ve been considering refinancing your mortgage for a while now. Today’s rates are lower than the rates you agreed on with your mortgage, you’ve got equity so you have a bit of a cushion, and you keep hearing about the no fee refinance. Well if it’s not going to cost you anything and you will end up with a lower interest rate, why not? Why wouldn’t you refinance? The answer is, maybe you should. It might just work to your benefit. But there is no such thing as a refinance that doesn’t require fees, so read closely because this is going to be explained.
Closing Costs and Other Fees
When you get a refinance on a home mortgage you are going to be faced with multiple fees. First, there are the closing costs. This in and of itself is typically in the thousands. It has to be paid. On top of these costs, you also have the many fees that must be paid to various sources before the refinance. Some of these fees include appraisal fees, inspection fees, title and title insurance fees, underwriting fees, lawyer fees for you and lawyer fees for your lender, mortgage insurance fees, and in some cases pre-payment penalty fees. This list is by no means extensive but you get the general idea. A refinance is expensive no matter how you slice the pie. Everybody involved in the process needs to get paid for their work, and your lender needs to make sure the refinance is going to be a good deal for him as well. So you absolutely cannot get a no fee refinance. So now you’re probably wondering what they mean when they talk about your no cost options.
How the No Fee Refinance Works
While all of the fees mentioned above are required on every refinance across the board, that doesn’t mean that you have to pay the fees up front. This is where the term ‘no-cost’ comes in. In reality, it simply means that instead of slapping down thousands of dollars for the closing requirements and the many fees involved, you have them all rolled into the loan. So it’s more of a ‘no-cost-up-front’ kind of thing. The beauty of the no fee refinance is that you can essentially get a refinance for fairly cheap, at least initially. However, there are downfalls to this because you will more than likely end up with a slightly higher interest rate and, of course, your mortgage amount will increase. While these are downfalls they aren’t necessarily reasons to run screaming away from the no-cost option. Just make sure you go into it knowing full well what you are agreeing to and, if at all possible, pay the costs up front so you can lock in the lower interest rate.
A good way to determine whether or not the loan will be worth it is to get an estimate of how long you are going to be in the home and then calculate the time it will take you to break even on the cost of the refinance. For some homeowners this can take a few years so if you end up moving out of the home within a year or two of refinancing, you will more than likely end up losing money. While you’re calculating your break-even point you may as well calculate your bottom line as well, so you know whether or not this move will save you money in the long run.
If you want to reduce the costs of the refinance here are a few tips you might want to consider. First, shop around. Get quotes from multiple lenders and compare each of them to each other and to your existing mortgage. By getting these quotes you will be able to secure the best refinance for you. Second, negotiate. Negotiate everything, as much as you can. Unlike the grocery store, when you refinance the prices that pop up are negotiable. Not on everything but on enough of the fees that you may be able to significantly reduce the amount you’ll have to pay in fees. If a penny saved is a penny earned than the hundreds you can save by negotiating will definitely be worth the time it takes to figure it out.
Refinancing can be a great way to adjust the terms of your home mortgage to make them work for you. Just make sure you keep yourself informed during the entire process so when you finally sign the contract, you will be signing on a loan that will benefit you financially.