Many Americans today are looking for no cost refinance mortgages to take full advantage of super low interest rates. You can now refinance in the 3 to 4% range, as of 2020 without mortgage refinance 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 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.
Here are some benefits and considerations of these no cost 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.
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 cost refinance loans created for remodeling, home rehabilitation and more. Read more on construction loans vs. home equity credit lines in 2020.
3. Makes Shopping for No 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 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 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 or Lender Fees
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 cost refinance, also called a no lender fee refinance. There are many lenders today offering these types of mortgage refinances.
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.
So, 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 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 Cost 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 $3500 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 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.
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.