Before applying online, you should learn about the pros and cons of no closing cost mortgage refinance loans. Many Americans today are looking for no cost refinance mortgages to take full advantage of super low interest rates. Borrowers cherish refinancing with a no closing cost mortgage because they can potentially lower their monthly payment without increasing their mortgage debt or coming out of pocket to pay loan closing costs.
How to Refinance with a No Closing Cost Mortgage with No Lender Fees
Today, you can still shop and compare lenders offering mortgage refinancing with no closing costs. If you paid a much higher interest rate a decade ago, you could easily save hundreds or thousands per year in interest charges. But if you are going to refinance and want to reduce your out-of-pocket costs, what are your options? Well, most home refinances have closing costs, which total at least 3% of your loan balance, but now there are no closing cost refinance loans.
A ‘no closing cost‘ refinance loan is defined as one or more of the following:
- Loan has no lender fees
- Mortgage has no closing costs at all
- Loan has no out of pocket costs or any refinance closing costs
Of course, any time the lender pays anything for you, they are making up for it somewhere by charging you more.
Can Closing Costs Be Included in a Loan?
Yes you can roll the mortgage refinance closing costs into your loan, but you can also find lenders that offer no closing cost refinance mortgages and that will minimize your loan amount and ultimately the amount you have to pay back.
Here are some benefits and considerations of these no closing cost mortgage refinance loans:
1. Save Up Front Costs
One of the reasons that some people do not refinance even if the current interest rate is 1% lower than what they are currently paying, is very simple: Closing a new loan costs thousands in closing costs, and not everyone can afford it. So, some homeowners end up hanging on to an old loan that is costing them thousands more in interest every year.
The obvious major benefit of a no closing cost refinance loan is your out of pocket expenses are minimal when you complete a mortgage refinance loan transaction. When you choose this option, your refinance closing costs are normally covered by the lender charging you a slightly higher interest rate. This means that you still pay closing costs, but you pay them over the life of the loan.
Generally, experts would advise paying your closing costs up front if you can afford it. After all, you will be paying interest for years on the closing costs that are added to your loan. However, if the extra $6,000 or $10,000 you have to pay up front is going to empty your reserves, you could justify using a no closing cost mortgage refinance.
Also, you should consider how long you are staying in the home. If you are enjoying an interest rate that is 1 point lower than your old rate, you may be able to enjoy enough savings each month to pay for the closing costs in three or four years. If you plan to move next year, you may want to not refinance at all as you will not enjoy enough savings in that limited time to cover refinance closing costs. Find out how to refinance a mortgage with no appraisal.
2. Renovate Your Home with No Closing Costs or Fees
If you are paying no up front closing costs, you can save yourself thousands of dollars. Sure, you are paying the closing costs over the life of the loan, but this leaves you with thousands more in your pocket up front. You could use that money for all sorts of things that can benefit you.
For example, you could take that $10,000 you saved in closing costs and renovate part of your home. Ten thousand dollars would pay for new cabinets in a kitchen, or new tile and granite counter tops.
If you invest the money wisely into your house, you may be able to get most or all of that money back when you sell the home. So, by not paying closing costs, you are going to get more money back when you sell, which can be a really good investment. There are several no closing cost refinance loans created for remodeling, home rehabilitation and more. Read more on construction loans vs. home equity credit lines.
3. Makes Shopping for No Closing Cost Refinance Loans Easier
One of the variables in shopping for most home loans is that you never know on the surface level what the closing costs will be. Sure, when you get into the deal with a lender, they must provide a good faith estimate, which includes an estimate of closing costs. But you don’t get that information when you are just loan shopping. A nice thing about a no closing cost refinance is that it makes shopping for your loan easier. If the costs up front are zero and the loan product is the same, the only variable you have to worry about is your interest rate. Learn more about the fundamentals of shopping interest rates for a refinance mortgage.
Another advantage of shopping no fee refinance mortgages is that the lender has committed to charging you no closing costs. You know they cannot slip an extra charge in there, as they promised there are no closing costs.
You will want to get in writing exactly where they are making up paying for your closing costs. You should know exactly how much higher your interest rate will be to cover those closing costs. Ask lenders to show you an option for a no closing cost refinance and a loan with regular fees and closing costs so you can compare the interest rates.
Considerations with No Closing Cost Refinance Loans
No closing cost refinances have many advantages, but they are not for everyone. Here are some things to think about:
- Nothing is free in life. No lender is going to pay your closing costs without making it up somewhere else, and probably with interest! You will be paying a higher interest rate, which means you are paying interest on those ‘saved’ closing costs. However, this is justifiable if you are getting a substantial savings each month in your payment. If you don’t refinance to just not pay closing costs and you are paying a much higher interest rate as a result, this doesn’t make sense either.
- Refinancing does not always make sense; if you are going to be leaving the home in the near future, it may cost you too much in closing costs to make it worth it, even if you have a ‘no closing cost’ loan. Also, if you are going to pull out cash and pay off credit cards and run them up again, you may just be enabling bad behavior.
A no fee or no cost refinance can be a very good tool for people in some situations. It is especially well suited for the borrower who lacks cash but could save substantially on their monthly payment be doing a refinance. Even if you pay a higher interest rate, you still could save thousands in interest each year. Knowing exactly when to refinance or take out a HELOC can be difficult but when you have the ability to save thousands of dollars, it should become a financial priority.
How to Refinance Home Loans with No Closing Costs
No matter if you are getting a new home loan or a refinance, every mortgage has closing costs and lender fees associated with it. In many cases, the closing costs on the loan will be in the thousands of dollars, and the lender fees add even more on top of it.
What if you have already almost drained your savings account getting your home and you do not want to pay closing costs? You can opt for a no closing cost mortgage refinance, also called a no lender fee refinance. There are many lenders today offering these types of mortgage refinances. Yes there are no fee options for cash out mortgage refinances as well.
How is this done? Well, there is nothing free in life, and this is no exception to that rule. To have the lender pay your closing costs and have no lender fees up front, you will probably need to pay a slightly higher rate over the term of your loan. On a very rare occasion, the lender may waive the fees and closing costs outright, but that seldom occurs.
For example, if you are paying closing costs with a 3.75% loan rate, then you might pay 4.125% to have the closing costs and fees waived.
When a No Cost Refinance Mortgage Can Pay Off
Typical closing costs will include loan origination fees, appraisal costs and search/title fees. The costs for all of these will vary somewhat depending upon your state. But the general trend on them has been rising as the economy is getting better and housing prices are going up.
A mortgage refinance without closing costs are especially attractive for those who do not have enough cash left to pay for the fees when the loan closes. Going with a no closing cost loan can be the difference between getting a mortgage or not.
Also how long you plan to stay in your home with be an important factor for whether you want to pay closing costs or not. If you think you are going to move out within five years, it could be logical to not pay closing costs. With many mortgage, it can take up to five years to recoup those lending costs.
Meanwhile, the slightly higher rate you are going to pay with a no cost mortgage refinance will probably cost you less over five years than you would have paid up front.
Finding where that break-even point is will be important, the experts tell us. For instance, if you have a loan at 6.5% and you think you are going to be in that house for four more years, you could be a great candidate for a no closing cost loan.
Also, if you want to make renovations on your home, you may want to save the money in your savings account instead of paying closing costs.
When It Won’t Pay to Get a No Closing Cost Mortgage Refinance
However, if you are planning to live in the home for at least five years, a no closing cost loan could cost you a good deal more in the long run. This is going to be true whether you are getting a new equity loan or house refinancing.
Most buyers and home owners find that they will break even in a few years on closing costs. Getting a no closing cost refinance will mean you have a higher interest rate.
For owners who are paying that rate for 20 years, clearly you could end up costing yourself a lot more money over the long run than paying the closing costs up front.
For instance, let’s look at a $150,000 loan with a rate of 3.75% and $3,500 in costs to close. The other has a rate of 4.25% and zero closing costs.
With the higher interest rate, the no closing cost choice will cost you $44 per month more. That is more than $15,000 over 30 years. In this case, it would take you less than seven years to break even and get your closing costs back.
Considerations and Tips on No Cost Refinance Loan Options
Many people consider no closing cost loans because you don’t have to cough up all that money at closing. If you are thinking about this option, we ask you to keep these tips in mind:
- The term for no cost mortgage loans can vary a lot by the lender. Some mortgage loan programs may cover all of your closing costs. Others may still charge you some third party fees for title, appraisal, inspection, escrow and possibly mortgage points. If you are considering a no closing cost option, you should understand what fees are covered by the lender and which are not.
- If the lender says they offer a no lender fees loan, you could expect to pay third party fees, interest and insurance.
- No closing cost refinance loans are neither good or bad. They are not scams, nor are they magic. You are going to pay your closing costs up front. Or you will pay them over the years. The benefit/cost analysis really depends upon your financial situation, the fees involved and what the effect is on the interest paid over the loan’s life.
- If you are considering a no closing cost option, it is very important to run the numbers several times to see when your break-even point is. Whether it is worth paying no closing costs up front really depends on how long you will live in the home.
- If you have no idea how long you will stay in the house, our tendency would be to pay the closing costs up front; you are going to likely pay so much more over the years if you go with a no closing cost loan.
- Be aware of lenders that like to bundle your closing costs into the cost of the loan. This increases the size of the loan, and you probably are paying a higher rate on top of it. You don’t want to be paying both a higher rate AND a higher total mortgage amount.
- Always remember to shop around and negotiate. You should ask several lenders what their best option is and ask for a no closing cost option too. This way you can see what the difference is going to be without telling them what you want to do. If you tell them up front that you want to have the no cost option, you will never really know how low your interest rate could have been.
When researching and comparing refinance options, two terms that often arise are “no-cost” and “no-fee” refinance mortgages. Let’s consider them both below and explore the benefits and risks so you can make a wise decision.
No-Cost Refinance Mortgage Loans:
- Reduced Upfront Costs: The primary advantage of a no-cost refinance is evident in its name – it typically involves little to no upfront out-of-pocket expenses. Traditional refinances often entail closing costs, including fees for application, appraisal, title search, and other services. With a no-cost refinance, these costs are absorbed by the lender or rolled into the new loan amount.
- Short-Term Savings: Homeowners opting for a no-cost refinance may experience immediate savings in the short term. Without having to pay upfront closing costs, they can benefit from reduced monthly payments right away.
- Higher Interest Rates: To compensate for covering the closing costs, lenders offering no-cost refinances may charge slightly higher interest rates. Over the life of the loan, this could potentially result in homeowners paying more in interest compared to a traditional refinance with lower rates.
- Long-Term Costs: While the immediate savings are appealing, homeowners should consider the long-term implications. If they stay in the home for an extended period, the higher interest rate could lead to paying more in interest over the life of the loan, offsetting the initial cost savings.
No-Fee Refinance Mortgage Loans:
- Lower Interest Rates: No-fee refinance loans generally come with lower interest rates compared to no-cost options. This can result in substantial long-term savings, especially for homeowners who plan to stay in their homes for an extended period.
- Long-Term Cost Savings: Over the life of the loan, the lower interest rate associated with a no-fee refinance can lead to significant cost savings. Homeowners benefit from reduced monthly payments and lower total interest payments compared to loans with higher rates.
- Upfront Costs: While the term “no-fee” may suggest no upfront expenses, it often means no out-of-pocket costs specifically associated with closing. However, homeowners may still encounter third-party fees, such as those for appraisals or title services. These costs are typically rolled into the loan or covered by the lender but should be considered when evaluating the overall savings.
- Potential for Higher Closing Costs in the Long Term: Although no-fee refinance loans offer immediate savings, homeowners should be aware that the absence of upfront costs may result in slightly higher closing costs being spread over the life of the loan. While this is often a favorable trade-off for those staying in the home long term, it’s essential to understand the financial implications.
It is important to choose between no-cost and no-fee refinance mortgage loans involves considering the short-term gains versus the long-term costs. No-cost refinance mortgages appeal to borrowers seeking quick savings and less expenses out of pocket, but they typically come with higher mortgage rates over time. On the other hand, no-fee refinances offer lower long-term costs with lower interest rates, but homeowners should be aware of potential upfront costs and the need to stay in the home for an extended period to maximize savings. When considering refinancing your home, it’s recommended for homeowners to factor in their financial goals and evaluate the terms of each option before committing to a specific lender.
We like the fact that there are no closing cost home loans out there, both original purchases and refinances. The more choices consumers have when they buy or refinance a home, the better. However, it is incumbent upon the homeowner to really study the matter and to determine the best path forward for them. If you do not do your financial homework, you easily could end up paying far more in closing costs over the life of the loan than you would if you paid them up front.
At the end of the day, it all comes down to how much cash you have available at closing and how long you want to stay in the house. Once you know those answers, you can decide what to do.