Most of my blogs have been directed to new buyers, etc; today I am focusing on the current or soon to be homeowner. One of our biggest allies has turned into somewhat of a foe by advertising the so called “No Cost Refinance”. You have probably seen the ad from this company (withholding the name to spare the guilty) and thought to yourself this is too good to be true. And you are somewhat correct….
The no cost refi program truly has no closing costs; all the closing costs and third party fees are paid by the lender. Let’s discuss the true pros and cons of the no cost refinance program. Typically, a no cost refinance will come with a higher interest rate. Face it; there really is no free ride no matter how cleverly disguised!
One of the main factors in determining whether a no cost refi is the "right" way to go is to look into your financial situation and see what your future goals are. A no cost refi is a good idea if you are considering moving in a few years or you know that you will need to refinance in a few years. The reason being is that by obtaining a no cost refi you are going to pay a higher interest rate than you would have by just simply paying for the closing costs or rolling them into your loan. Most of the time the closing costs could have been paid for within a couple of years with a lower rate loan and therefore if you keep the no cost loan more than a couple of years you will be stuck with that higher interest rate for the life of the loan or long after you would have paid for those closing costs. This will cause you to pay much more in interest over the life of the loan. After discussing your goals and needs with your mortgage professional he or she should be able to provide you with their opinion on which type of refinance will be best for you, "no cost" or "with cost".
Whether a no-cost refi is the way to go depends on a couple of factors. ... If you're planning on moving fairly soon, the no-cost refi might very well make sense.
One way to find out which method is best for you is to find your breakeven point. The breakeven point is the number of months it would take to recoup your closing costs based on your savings in monthly payment. For example if you incur 5,000 in closing costs which result in a $250/month savings, it would take 20 months to break even of the closing costs.
Again the large corporate lender that advertises the "NO Cost Refi" puts it in a way that appears to save the borrower money. Again name withheld to spare the guilty! But I know you have seen or heard the commercial. The fact is that over the life of the mortgage the higher interest rate of a No Cost Refi will cost you substantially more money. You are better off paying closing costs out of pocket or rolling them into the loan in return for a lower mortgage interest rate.
When you hear the term "NO Cost Refi", ask yourself how are they going to make their money. (Remember there are no free rides!)The answer is in the form of a higher interest rate. You may save a few thousand dollars upfront but you will be paying tens of thousands of dollars in the long run. These loans are great for borrowers without the ability to pay the upfront fees but borrowers who can afford them should be very leery about using them.
While a no cost refi may sound like a dream come true, talk to a local and accountable mortgage professional about the detailed costs of originating a new loan or refinance. There is no such thing as a free ride, and sadly, there is no such thing as a free refinance either. How you choose to pay may dramatically impact how much you spend on your mortgage over the long run.
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