Mortgages, however, always come with closing costs. Whether you pay them out of pocket or roll them back into your loan, closing costs can amount to thousands of dollars.
Fortunately, there are options available to U.S. homeowners that allow for very little, if any closing costs.
Since the average U.S. homeowner sells their home or refinances every five to seven years, a no-cost refinance could be a great option.
WHAT ARE MORTGAGE CLOSING COSTS?
Whether you’re buying a home or refinancing one, all mortgage loans will come with at least some closing costs.
Closing costs are fees associated with obtaining a mortgage loan.
Closing costs can vary widely according to where you live. According to Bankrate, Hawaii and New Jersey were amongst the highest closing costs states. Ohio and Idaho were the lowest.
Typically, homeowners will pay between two to five percent of the loan amount for closing costs.
Mortgage closing fees can include:
• Loan origination fee
• Credit report fee
• Appraisal fee
• Title search fee
• Title insurance fee
• Attorney’s fees
• Recording fees
Adding thousands of dollars to your loan balance may seem counterintuitive to refinancing. That’s why a no-cost refinance may be just what the doctor ordered.
HOW NO CLOSING COST REFINANCES WORK
They are known by a variety of names – no cost refinance, no fee refinance, no closing cost mortgage refinance. All of these names refer to the same thing – a mortgage refinance that has nominal closing costs.
Generally, the way that a no-cost refinance works is that the homeowner will opt for a slightly higher interest rate. In return, the lender will offer a lender credit that offset the costs.
Depending on the amount of closing costs, as well as the size of the loan amount, some loans may not be eligible for a no-cost refinance. However, even when a loan amount isn’t large enough to cover the full costs, homeowners may still qualify for reduced closing costs.
Not all lenders offer no-cost refinance options. It’s important to shop around and compare.
PAYING CLOSING COSTS VS. A NO-COST REFINANCE
Most of the time, the lower the interest rate, the better the savings for the homeowner. However, a no-cost refi can definitely make sense for some homeowners.
Generally, homeowners may want to consider a no-cost refinance if A) they don’t plan to stay in the home for more than a few years, or B) tend to refinance frequently.
If you’re one of these two types of homeowners, it may be ideal not to pay thousands of dollars in closing costs, but still save on your monthly payment with a lower interest rate.
For example, let’s say you are refinancing a mortgage balance of $200,000 and your lender’s closing costs are $3000.
If your new 30-year fixed rate is 3.5%, your monthly principle and interest payment would be $898.09
Let’s assume that by refinancing, you were able to save $150 per month. That means it would take you 20 months to recoup your closing costs ($3000 divided by $150 = 20).
Now, let’s look at the same scenario but instead of opting for the 3.5% rate and the $3000 closing costs, you opted for a 3.875% with no closing costs. Your new principle and interest payment would be $940.47.
Instead of saving $150 per month, you’d save approximately $107 per month. The key here though is that you paid zero closing costs so your recoup time is immediate.
For a homeowner that plans to move within the next two years, the second no-cost scenario could be a great option.
As mortgage rates continue to hover at all-time lows, a no closing cost refinance could be the perfect way to refinance without paying thousands of dollars in fees, and still get an extremely low rate.
Shop and compare the differences in interest rates, with and without paying closing costs, to determine which type of loan is best for your needs.