FHA no fee refinances can be a really great financial move, or they can be a really great financial blunder. While they sound extremely enticing, they aren’t always the best move for every homeowner. Nobody wants to pay up-front fees, that’s completely understandable, but the reason you refinance is to reduce the overall cost of your mortgage so this should be your end goal when refinancing. When considering the no cost option through the Federal Housing Administration, here are a few things you should know.
When You Could Benefit from an FHA No Fee Refinance
The beauty of the FHA no fee refinance is that you can get a mortgage refinance with very little or no up-front cost. This is achieved by rolling the closing costs into the mortgage amount. To do this you do have to have a certain amount of equity in the home, to cover the additional amount.
For many homeowners this option seems like the perfect fit. They are able to reduce their mortgage payments and interest rates while bringing up the loan amount just a few thousand dollars, on average. The money saved from the reduced payment will help to offset the increase in the mortgage.
This option is best for homeowners who do not intend to live in the home for a long period of time. When you refinance your home, regardless of whether you use the no cost option or whether you pay the closing costs in full, you are going to have a certain point where you break even. This is often around the five year mark, though it is different for each circumstance. The financial benefits of the refinance don’t really hit until you reach the break-even point. After that, you continue to pay down your loan at the lower rate that you secured when you refinanced.
With a short term loan, having the fees rolled into the mortgage isn’t a problem because you will more than likely be out from under the loan prior to reaching the break-even point, which means there is a good chance you will save money by putting the closing fees into the loan. If you intend to use the no fee option on a long term loan, then it’s best to do this when the interest rates are high and you intend to refinance within the next few years to reduce the rates. In both scenarios you replace the loan before you break-even.
When to Avoid No Cost Financing
As mentioned previously, the no cost option does have benefits and can be a great option for homeowners. However, there is a downside to every good thing and this definitely has one. When you refinance using the FHA no fee refinance you will get a higher interest rate. It may not be a big jump, but when you pay on that increased rate for thirty years, you will pay quite a bit more for your financing than you would have at a slightly lower rate.
The no cost refinance is ideal for homeowners who want a short term loan, but for homeowners looking for a long term investment, this may not be the best option. After you reach the break-even point, you will continue to pay on the mortgage at the increased rate. Year after year after year. If you pay the fees up front and get a lower interest rate, you will more than likely save money over the life of the loan.
It’s also wise to avoid the no cost option when interest rates are low but trends show that they may soon rise. Locking in the lowest rate possible on a loan is the best way to save money on a mortgage, so when you refinance it’s a good move to secure the lowest rate possible, even if that means you end up paying more up front in fees and points. It can be worth it in the end.
If you’re not sure whether or not the refinance will save you money, you may want to compare your current amortization schedule with the amortization schedule of the new loan. This will give you an idea of how much interest you will be paying out after you’ve completed the refinance. Also, you can get online and compare the loans with a refinance calculator. This will give you an estimate but again, it’s a good away to get a snapshot of what you can expect for your future loan.