Common Misconceptions of the FHA No Cost Refinance

Refinancing is one of the most common aspects of home ownership. Nearly every homeowner at some point or another will revisit the loan in an effort to gain some financial benefit from resetting the terms – either they will reduce mortgage and/or interest payments or they will cash out the equity for other investments and uses. Either way, they’re taking advantage of the refinance to improve their own financial situation. Now, you may have heard about the FHA no cost refinance. While this is a great option for homeowners, especially cash strapped homeowners who can’t afford closing costs, there are a few misconceptions that deserve to be cleared up.

FHA No Cost Refinance is not No Cost

photodune-6503407-home-xsThis is the biggest misconception you may experience when you hear about the no cost option. Nothing is free in life, and this is no different. Refinances operate much like a first time loan on the home, so there are plenty of fees involved and there are always thousands of dollars in closing costs. These need to be paid by somebody. The no cost option is simply a way of stating that the closing costs of the refinance do not need to be paid up front, at the closing of the loan. They will still need to be paid.

What happens when you secure an FHA no cost refinance is you convince the lender to roll the closing costs into the mortgage amount. You’ll increase the amount by a few thousand dollars and you’ll pay down all of it over the life of the loan. To be more accurate, the no cost option is more like a delayed payment option.

Another discrepancy you may be wondering about is the interest rate. A lot of people refinance to secure a lower interest rate. With the no cost option, you may have a rate that is just a little bit higher than you would have gotten otherwise. It’s not uncommon for the lender to increase the interest rate because they are taking on a greater risk with the bigger loan. Make sure you take this into account when you choose the no cost option. You want to make sure the financial benefit for you will still be worth it with the increased interest rate and mortgage amount.

A Streamline Refinance is Not a No Cost Option

If you were to do a Google search for an FHA no cost refinance you’re going to find a lot of information pushing you toward the streamline refi. According to the website “Streamline refinance refers only to the amount of documentation and underwriting that the lender must perform, and does not mean that there are no costs involved in the transaction.” also state  in the same article, “FHA does not allow lenders to include closing costs in the new mortgage amount of a streamline…”

According to these sources, the streamline is definitely not no cost. It is an option available to homeowners with existing federally insured loans. These homeowners are able to streamline the process of the refinance by foregoing an appraisal and avoiding documentation that is required on a standard refi. Federally approved lenders work with these situations to get the refinance completed more quickly. With a streamline you can only qualify if the terms of the loan will lower your monthly mortgage and interest payments, and you cannot cash out the equity. Its sole purpose is to get the homeowner a mortgage that is easier to handle.

Of course, just because the streamline cannot be acquired as a no cost option, that doesn’t mean that you can’t get a no cost refinance through the federal program. You absolutely can. You will just be required to follow standard procedures for a refinance, including increased documentation and a home appraisal. It will be a little more involved and it will take more time to complete, but it’s definitely doable.

The no cost option is most beneficial when you don’t intend to stay in the home for an extended period of time. Typically after you’ve rolled the closing costs into the loan you’ll be out from under them in about five years. After that, without selling the home or refinancing again (which isn’t always a good idea) you will continue to pay on a slightly higher mortgage than you would have otherwise, which means over the life of the mortgage you will more than likely pay more in interest because of those fees.