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No-Closing Cost Refinance: Is It Worth It?

January 22nd, 2018 9:58 AM by Jackie A. Graves, President

A no-closing cost mortgage refinance is when you refinance your mortgage and don’t pay the upfront mortgage refinance fees — often between $2,800 and $4,000 — in exchange for a higher rate or a higher loan balance. Let’s review whether this option is the best choice for you.

What Are No-Closing Cost Mortgages?

Common reasons people refinance include the following:

  • To get a lower mortgage rate, which creates a lower monthly payment.
  • To take cash out by accessing equity in the home — this increases loan balance and monthly payment.
  • To combine a first and second mortgage into one new first mortgage.
  • To eliminate mortgage insurance.

In all cases, a new refinance mortgage is a new transaction which costs about $2,800 to $4,000, depending on your market, the value of your home, and the size of your loan.

The bulk of these fees are underwriting, appraisal, title, and settlement fees.

When you’re shopping for a loan, you’ll often hear lenders talk about “no-closing cost mortgages” or “zero-closing cost mortgages.”

This doesn’t mean you’re not paying the closing costs, it just means these closing costs are being re-allocated in some other way.

Rate Adjustment on No-Closing Cost Mortgages

One way the closing costs get re-allocated is with a rate adjustment. If you don’t pay closing costs, your rate will be higher.

How much higher depends on your loan amount. The lower your loan amount, the higher the rate adjustment will be to cover your closing costs. In general, you can expect your rate to be between .25 percent and .5 percent higher if you go with a zero-closing cost mortgage.

For example, if you were refinancing a $200,000 loan with a zero-closing cost mortgage, you might pay a rate that’s .375 percent higher than if you paid the closing costs. This means your monthly payment would be $42 per month higher for the life of the loan — but you’d conserve about $3,000 in costs at closing.

Loan Amount Adjustment on No-Closing Cost Mortgages

Another way closing costs get re-allocated is by adding the closing costs to your loan amount so you’re financing the closing costs over the life of the loan.

In our refi example where a $200,000 loan has about $3,000 in closing costs, your loan amount would be adjusted to $203,000. This would increase your payment by about $13 per month. And you’d get the lower rate, unlike the scenario above.

How Do You Choose the Best No-Cost Option?

Comparing a rate adjustment versus a loan amount adjustment using the scenario above, you might choose the loan amount adjustment because it conserves monthly payment and also keeps the rate low.

But each client scenario is different, because loan amounts and actual closing costs change. Also, rate markets change daily, so the rate adjustment needed to cover closing costs changes all the time.

That’s why you need to present your entire scenario to your loan officer, and let them recommend the most cost-effective option for you.

Are Zero-Closing Cost Mortgages Only Refinances?

These zero-closing cost mortgages are most often used for refinances, but can be used for purchase loans.

However, the most likely scenario for accomplishing a no-cost transaction on a purchase is to adjust the rate higher.

It’s less common to add the closing costs to the loan amount on a purchase because it can disrupt qualifying by making your loan-to-value ratio too high.

If you’re trying to conserve cash during a home purchase, ask your lender to recommend options based on your profile.

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Posted by Jackie A. Graves, President on January 22nd, 2018 9:58 AM

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