No Closing Cost Refinance - If you're wary of getting blindsided by unpredictable fees, a refinance with no closing costs may sound like an attractive option.
While it may initially seem that you're getting something for nothing, the no closing cost refinancing option actually does come with a price. Let's explore the features of a refinance without closing costs, so you can determine whether this is a good fit for your financial situation.
Typical fees associated with a traditional mortgage include title search and courier fees, flood certification and loan certification fees, recording fees, and attorney's fees, to name a few. Even with a low-cost, no points loan, these fees can add up to several hundred or even thousands of dollars.
With a no closing cost refinance, the lender foots the bill for closing costs without increasing your loan balance. Here's a list of fees that are not included with a no cost refinance:
Prepaid homeowner's insurance
Prepayment penalties on an old mortgage
Prepaid interest on a new mortgage (interest paid on the new loan when the mortgage closes on a day other than the first of the month)
While the benefits of a no closing cost loan may sound attractive, there is a flip side to consider: higher interest rates. Instead of paying a lump sum up front, the higher interest rate ensures that you'll pay a little extra over time and, depending on how long you'll keep the loan, you may end up paying too much. To determine whether this type of refinance will wind up costing you more in the long run, use a loan amortization calculator to compare the total costs of your interest rate and the costs associated with a loan where you'll be paying the fees.
Generally speaking, a refinance no closing costs makes the most sense in the following scenarios:
You won't keep the loan for very long
You plan to sell or refinance
Your profits from invested cash offset the additional expense
A refinance without closing costs is like choosing between a lump sum and a series of payments after winning the lottery: pay up front, or pay throughout the life of the loan. As with any financial decision, evaluate the costs and benefits closely before finalizing a loan.