Refinancing has a bit of rules and regulations that makes it a very easy choice for some homeowners. In the case of a no cost refinance, upfront fees are covered by the lender typically in exchange for a higher interest rate paid out by the homeowner. As a homeowner, you should decide if this is a solution worth taking for your financial situation compared to other refinance plans.
Why should you use a no cost refinance?
It all depends on your reasoning. If you decide on using this refinance for less than five years, it could be a great way to waive your upfront costs and save you thousands of dollars. It’s wise to think of how this will affect you after a few years because this can easily come out in a whopping mortgage total. Another reason this type of plan works well is by transferring into another refinance situation or even selling your property soon. You’ll be glad to save a lot of money from paying numerous fees. Additionally, you’ll find that using a no cost plan is great for renovating your home especially when you have no cash to pay the fees. If you know interest rates will drop, it’s a smart move for a short term save on fees.
Why is a no cost refinance risky?
There are a number of factors that make a this refinance not advisable. By not paying your upfront costs, it very well tacts on to your overall mortgage. It’s very important that you do your research to find out why it’s a good thing for your situation. Your interest rate can go up for quite sometime, which means a huge debt to pay in the long term. Some lenders may just add the fee to your mortgage balance, anyway. You’ll end up paying it in the latter run.. Additionally, you have to consider times where the interest rates can go up. What may save you a $300 now, can end up costing you $500 every month in the future. It’s advisable to pay these out of pocket fees if you have the funds to save yourself trouble from the start.
Are there any other refinance options (FHA financing)?
A no cost refinance should not be your only solution. If you find that you can fund upfront fees right away, you have a couple of options available. Let’s say your equity is pretty solid. You may want to do a conventional cash out. If you have a 20% down payment in your home, you can use the built up equity for a number of things. For example, a cash out allows you to receive a cash sum you can put towards other debts such as school loans, auto loans, and even funding your vacation. Also, you can re-invest in your home or invest in another property. The main issue is having all of your paperwork together. It may take time to appraise or even repair your home to meet the lender’s standards as far as health and safety requirements. Typically, you should wait 12 months after your home purchase to build up enough equity for a solid refinance plan.
If you decide you want to lower your interest, FHA streamline refinance may be a great choice. The process is a bit different because you have to be under a federally insured lender, which means the property you plan to refinance is your primary residence. Also, you cannot get cash from your equity or use it for your own personal reasons. Although there are restrictions for your usage of equity, there is less paperwork. Some qualifications include a history of steady payments for 12 months with only two, 30 day late payments. Also, they want to see if you have a steady employment record to ensure you can pay the monthly mortgage rates. Make sure you have not done a federal streamline refinance plan in the past 6 months before applying.
Should you talk to a lender?
A no cost refinance may or may not be a good choice. You have to weigh your options for short and long term decisions. Listening to a reputable lender will help you decide if this a poor choice based on your finances as well as the market rates. Saving money now is great, but it may lead to a bite in the back few years down the road.
This is a refinance plan that you should take with a bit of caution. If you are doing it for the short term, it’s great to avoid or put off upfront costs. However, you should weigh other options if you need a plan more long term.