A mortgage refinance with no closing cost may seem attractive on the surface, but this type of refinancing may not really save you money in the long run. In this article, you will learn how refinancing a mortgage with no closing cost and how to determine whether (iStock)
Mortgage refinancing is a common option if you want to reduce your monthly payment or save money on interest. However, there is also a sum of upfront expenses that you will have to cover first in the form of new closing costs.
Some mortgage lenders offer what is called a mortgage with no closing cost. If you are thinking “what’s the catch?” In addition to knowing if this would be a smart option for you, here is what you need to know about refinancing options with no closing cost.
What is a no-cost refinancing?
As it seems, a refinancing cost without closing means that you will not have to pay upfront for fees such as your application, loan origination, a reevaluation of your home and a new home inspection. Instead, these costs will be moved to the principal loan amount so that you can pay them off with the mortgage.
Lenders may also not offer closing costs to refinance your mortgage, but as a result, a higher interest rate. This means that you may end up paying your closing costs in the form of loan interest over time. Although a higher interest rate does not change the principal amount of the mortgage, it can still increase your monthly payment, which is the opposite of what most homeowners looking to refinance want to do.
Before you decide to refinance your mortgage, be sure to do your research. Credible can guide you step by step through the refinancing process to ensure you find the best deals available for your personal finances.
WHY IT’S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW
Main disadvantage of cost refinancing without closing
In addition to potentially higher monthly payments, the main drawback is that you probably won’t get the best loan terms, even if your credit score is great. You may be stuck at a higher interest rate and have a higher principal loan balance.
There are also some costs and fees
The average cost of closing a mortgage refinance is about $ 5,000, according to Freddie Mac, but homeowners can expect to spend 2% to 5% of the loan amount. For example, if you owe $ 225,000 on your mortgage and choose to refinance, your closing costs can range from $ 4,500 to $ 11,250.
Let’s see how this can add up to a mortgage with no closing cost. If you refinance your home with a principal of $ 225,000 and the closing costs are $ 7,000, that amount would be added to your loan for a new principal of $ 232,000.
Using Credible’s mortgage amortization calculator, you can see that, when refinancing a $ 225,000 mortgage for a 15-year term with a 3.5% interest rate, you would pay $ 64,527 in interest. You can also use Credible’s free online marketplace to instantly compare rates and creditors.
Let’s say you opt for refinancing at no closing cost, where your lender will:
- Add the total closing cost of $ 7,000 to your main loan balance
- Increase your interest rate to 4.5%
This could result in the payment of $ 87,461 in interest over the 15-year term. Visit Credible to get prequalified rates without affecting your credit score.
WHO IS EXEMPT FROM THE NEW MORTGAGE REFINANCE FEE?
Is refinancing a mortgage with no closing cost right for you?
Refinancing with no closing cost can be the right move if you are low on cash but want to refinance your home quickly. If you don’t plan on staying in your home for more than five years, you can move in and sell it before you incur these long-term costs.
The main benefit is that you will not have to pay the closing costs of your new mortgage loan in advance. Although you will still pay extra costs in the future, you don’t have to worry about pooling the liquid funds to do this in order to secure your refinancing.
However, if you really want to reduce your monthly payment and save money on interest, you can consider other options if you run the numbers and they don’t make financial sense. Calculate the numbers using Credible’s free online tools.
REFINANCE YOUR MORTGAGE BEFORE LOW TAX REGISTRATION DISAPPEARS
Other mortgage refinancing options
If you are moving away from refinancing mortgages with no closing cost, here are some other options.
- Conventional Refinancing: Do you have another type of mortgage, but are looking to refinance to a conventional mortgage? Doing so is easy if you have good credit, equity in your home and can cover closing costs. Refinancing a mortgage for 30 to 15 years can also save a lot of money.
- Withdrawal refinancing: Refinance your new mortgage and borrow money at the same time with this option. A withdrawal refinance allows you to also roll your closing costs into the loan amount and receive a check. Therefore, the value of your new loan is likely to be higher due to the number of closing costs and the money you receive.
- FHA Streamline: A simplified FHA refinancing requires less paperwork (usually no new home appraisal is required), so you’ll save money on closing costs and get a new loan at a lower interest rate quickly.
Are you interested in refinancing your mortgage? Visit the Credible online market to buy creditors and compare rates.
HOW TO GET THE BEST MORTGAGE REFILL RATES