January 22nd, 2018 9:58 AM by Jackie A. Graves, President
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?
reasons people refinance include the following:
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
bulk of these fees are underwriting, appraisal, title, and settlement fees.
you’re shopping for a loan, you’ll often hear lenders talk about “no-closing
cost mortgages” or “zero-closing cost mortgages.”
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
the closing costs get re-allocated is with a rate adjustment. If you don’t pay
closing costs, your rate will be higher.
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.
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
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.
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.
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.
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.
why you need to present your entire scenario to your loan officer, and let them
recommend the most cost-effective option for you.
zero-closing cost mortgages are most often used for refinances, but can be used
for purchase loans.
the most likely scenario for accomplishing a no-cost transaction on a purchase
is to adjust the rate higher.
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.
you’re trying to conserve cash during a home purchase, ask
your lender to recommend options based on your profile.
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