Today’s conversational topic focuses on getting a new mortgage without having to be concerned with either paying closing costs at another time or even not at all. This type of a refinance has drawn criticism from both sides of the aisle. Depending on the person’s past and current history, one might find this type of a new loan to be helpful while for another it would become a financial disaster. A no fee refinance, also known as a No Cost Refinance, is something that cannot be considered as being an overall good or bad thing to go through. Different situations produce different results for those who are trying to decide if this new loan is worth getting approved for. So, our conversation for today will be to break down this process and lay out the positives and negatives that go with being approved for this new mortgage. In the end, it will be up to you to decide if this form of refinance will benefit you the most. On that note, let the conversation begin!
Looking at a New Mortgage known as a No Fee Refinance
When refinancing one’s home in order to use it as a source of extra funds, there are many options to choose from. One big issue that can prevent an individual from going through with the process is known as closing costs. This refers to any out-of-pocket expenses or up-front fees that must be paid before the new mortgage is final. Being that these fees can be expensive, it becomes a deal-breaker and then applying for a new loan is no longer an option. So, it is of no surprise that borrowers often seek a no fee refinance when finalizing the terms of the new mortgage.
There was a time where this type of a conversation was not worth having as lenders would want these costs to be paid upfront or would deny approval for the new mortgage. However, times have changed and lenders are offering ways to waive closing costs up-front. This is a huge benefit to the homeowner as closing costs can be expensive. Usually, the range for the costs is from 1.5 to 2% of the loan balance. For example, in order to pay closing costs on a $200,000 mortgage, it would generally cost from $3,000 to $4,000 in closing costs. Obviously, saving that much in up-front costs is a no-brainer and if these costs can be waived, then it would be beneficial to go this route. Yet, when looking deeper in how the closing costs are taken care of, does this type of refinance truly benefit the homeowner or prove to be more costly in the end?
Does a No Closing Cost Refinance Influence the Mortgage Balance?
bankrate.com, a personal-finance website says, “You will pay one way or another.” One way this happens is you be assessed a larger mortgage balance due to the costs that are figured into the principal. Another way is being given a larger interest rate (anywhere from 0.125 to 0.5% more) than you would have had if closing costs were paid up-front.
Something else to consider is that though the lender may be able to “eat” certain fees that would normally be paid by the borrower, other fees must be paid that the lender has no choice but to charge you. For example, the state of Florida requires, with no room for negotiating, tax stamps and title fees because it is their law. This means you need to know what fees can be settled with the lender while which ones must be paid because it is the law of the state. Some experts would say if you have the money to pay off the closing costs up-front, then you should do so. However, not everyone has that type of cash on hand so if this type of refinance is the only option, then you do what you have to do.
Choosing a Lender
A frugal customer, when shopping for any product, is always trying to find a way to save money. When it comes to refinancing, the same holds true and any way money can be saved is always appreciated. A no fee refinance can look so favorable because costly fees that usually need to be paid before closing on the new mortgage are waived. While some lenders offer this option, the fees usually end up being added to the loan and proving more costly in paying off the mortgage’s full balance than if the fees were paid at closing. That is why it has been suggested in order for this new mortgage to be successful, it is important to contact multiple lenders to see what fees can be “eaten” by the lender and which are required by the law. The less amount of fees that have to be paid, the more beneficial the refinance will be.