Refinancing isn’t a simple cut and dry process. There are many different options available and many different ways to secure the refinance. There are standard refinances and cash out refinances, streamline refinances (available only through FHA lenders), and no cost refinances. Each option has its own sets of pros and its own sets of cons. The no cost option is no different. There are many ways a homeowner can benefit from this option, but there are a few cons that you should be aware of before you take out the loan.
Why the No Cost Refinance is Tempting
When you refinance your mortgage what you basically do is replace your old mortgage with a new mortgage. The new lender takes the money they are lending you and pays off the old lender for the original mortgage. Most of the time the new mortgage is acquired under a different set of terms – these new terms are where people find value in the refinance. These terms may include a lower monthly payment, lower interest rate, or a reduced pay off time. It really depends on what you want as a homeowner, but the point of the refinance for you is to make a financial move that benefits you in the long run.
With that in mind, the no cost refinance is appealing to homeowners because it enables them to get the refinance without paying the closing costs – and sometimes other fees – up front and out of pocket. Instead, these fees are rolled into the mortgage, increasing the amount, and then they are paid off over time. Refinancing isn’t cheap. For a typical refinance you will end up paying thousands of dollars out of pocket if you don’t choose the no cost option. Saving this money up front has a lot of appeal for homeowners, especially if they are feeling cash strapped and are refinancing to lower the rate and mortgage payment. For homeowners where it isn’t possible to pay the closing amount up front, the no cost option may be the best option.
There is another group of homeowners that will benefit from this as well. These are the homeowners that don’t intend to keep the mortgage long term. For them, the no cost option carries a lot of appeal. When the closing fees are rolled into the mortgage payment, they are paid down over time. Typically what you pay over the course of four or five years in addition to the mortgage payment is about equal to what you would have paid up front so if you know you’ll be leaving the home or refinancing within that time period, it can be a smart move to take the no cost option.
Why Delaying Payment of the Closing Costs Can be Detrimental
Many homeowners can benefits from the no cost refinance, but that doesn’t mean that it is the solution to every situation. For some homeowners, it will do more harm than good to their finances. First, when you’re planning to stick with the loan long term you will continue to pay interest on the increased mortgage long after you’ve paid what would have been the original up-front fees. An additional four thousand dollars added onto the mortgage and paid over a thirty year period will end up being a good sized sum. Keep that in mind when you choose the no cost option.
Also, it’s not uncommon for the interest to be slightly higher for the no cost refi. While this may not be a big deal if you’re planning to move within five years anyway, it can make a really big difference over thirty years. Between the additional thousands on the mortgage and the higher interest rate, you may end up paying quite a bit more than you would have if you’d simply paid the fees at the close of the refinance.
While each lender has their own way of doing things when it comes to a refinance, most of them tend to operate similar to the situations mentioned above. The best step you can take before getting a refinance is to compare all of the refinance options along with several quotes from a variety of lenders. Once you’ve determined where you will benefit the most financially, you’ll want to contact your loan officer and get the process started. Remember, the refinance is there so you as a homeowner can be in a better place with your finances. If you won’t end up with a financial benefit, you may want to hold off until you do.