Mortgage refinance with no closing costs

Is a mortgage refinance with no closing costs right for you?

A mortgage refinance with no closing costs usually happens when the lender agrees to pay the one time closing fees. The borrower doing the refinancing usually considers this type of a loan because the it reduces he upfront cost of refinancing. The fees, referred to as closing costs, can sometimes amount to a few thousand dollars.

In exchange for offering you this type of a deal, you usually have to settle for a higher interest rate. This can mean anything from a 0.25% to 0.50% increase in your interest rate. Some lenders may also add the closing costs onto the amount of your loan. Either way, there really is no such thing as a real no-cost loan.

Since you will have to pay a slightly higher rate, a no closing costs refinance mortgage is only worth it if you plan on selling the house in next five to seven years. The reality is, that in the long term, a period longer than 5/7 years, the no closing cost option will turn out to be more expensive. The one-time benefit of no fees will be outweighed by the higher interest costs over the life of the loan.

A simple way to figure out how many months it will take for you to start "losing money" on your no closing costs refinance is to compare the difference in monthly payments. If you divide the amount of the closing fees, say $2000, by the difference in the monthly payment, say $40, than you can easily see that, in this example, the no closing costs option starts becoming more expensive after 50 months. That is a little over 4 years.

What fees are covered?

The no closing costs option only covers certain fees. Among them, the appraisal Fee, escrow fee, lenders fees, title insurance, "points" and broker´s fees. Certain other fees, like property taxes and insurance, have to be paid separately by the borrower.

When is no cost refinancing a good deal?

There are two main reasons why you would want to opt for a mortgage refinance with no cost:

When you a refinancing at lower interest rate than the current market conditions. This new rate, with the "no cost premium" added in, should be lower than your current rate
When you are refinancing for a very short period of time. You save a few thousand dollars in upfront fees and will only pay the higher rate for a few months.

Should I refinance?

If you have an adjustable rate mortgage, and in light of the current low interest environment, you should probably consider refinancing to a fixed rate mortgage. This is usually a good option, unless of course you are planing on selling your home in the next couple of years.

The important thing to keep in mind, is to do the math. Every situation is different and so are the conditions offered by lenders, so shop around for the best deal.

Where can I find no cost loans?

No cost mortgage refinancing is available from most banks and mortgage companies. You can search for them online, but your bank or current lender are also good places to start looking. Just remember to shop around and compare rates

With the current low interest environment, it might be the right time for you to refinance your current loan.