In the market for a “no cost refinance”? Although these mortgages can help borrowers avoid paying a big lump sum at the time the papers are signed, it’s important to understand that associated costs and fees don’t disappear forever.
Rather, a no closing cost refinance allows the borrower to either add the closing costs to the principal or exchange them for an increased interest rate. Either way, you’re still on the hook.
However, a no cost refinance can still help some homeowners make their finances more manageable. Read on to decide if the no fee refinancing approach is right for you.
No Cost Refinance: How Does It Work?
You know how they say that if something sounds too good to be true, it usually is?
Well, that’s true in this case, too. If your question is Can I refinance my mortgage with no closing costs? the answer, unfortunately, is not really.
Rather, a refi without closing costs means you get to process the refinance without paying closing costs right now … but those bills still need to be paid in the long run.
Let’s break it down.
What Is Refinancing?
A couple of signs a refinancing may be a good idea is if mortgage rates have fallen or if your creditworthiness has significantly improved since the time the first mortgage was taken out.
It can also help borrowers transition from an adjustable-rate mortgage to a fixed-rate mortgage—or a fixed-rate mortgage to an ARM.
Closing Costs? What Closing Costs?
When a borrower signs mortgage documents, there are a variety of fees and expenses (aside from the obvious cost of the home itself) that come along for the ride, which you probably remember from signing your mortgage the first time.
Rolled into the cost to refinance might be:
Lender fees. Borrowing money costs money! Your lender might assess an application fee to process your refinancing request, attorney’s fees if your state requires the presence of an attorney in order to formalize the loan, and a loan origination fee—also sometimes known as an underwriting fee—for preparing the mortgage, which can be 0.5% of your loan total.
You’ll also likely need to prepay the interest on the first month’s mortgage payment, and if you work with a mortgage broker, they’ll want a cut, too.
Third-party fees. Just like the original home loan, the process of refinancing may require a property appraisal, which means paying an appraiser, or necessitate a title search, which can run a couple hundred dollars. Basically, the costs of any service your lender has to pay for in order to make the mortgage happen are likely to be passed on to you in the end.
Other costs. Property taxes, homeowners insurance, and other costs may also be rolled into the bill due at closing. While it depends on your lender and the type of loan you’re taking out, all of these “and also” expenses can get pretty darn pricey.
The bottom line: Closing costs for refinancing usually end up being about 2% to 6% of the total loan amount, although the figure will vary based on the size of your loan, where you live, and other factors.
This can amount to several thousand dollars, and can be a large financial pill to swallow if the costs are to be paid upfront.
The Cost of a ‘No Cost Refinance’
Given all of those closing costs, a “no cost refinance” might be sounding better and better. But as mentioned, those bills don’t just disappear because they’re not due right now.
Rather, with a no cost refinance, closing costs will either be rolled into the principal balance of the new loan total or result in higher interest rates on the new mortgage. Either way, the borrower is still responsible for paying those costs over time.
And depending on their total expense, as well as the interest rate and loan term, closing costs can eclipse the savings you stand to gain by refinancing in the first place.
That’s why it’s always important to parse out the full amount you’ll pay over the life of the loan, rather than just looking at the interest rate and monthly payment.
Pros and Cons of a No Closing Cost Refinance
No closing cost refinances, like all other financial options and products, have both drawbacks and benefits to consider.
Benefits of a ‘Refinance Without Closing Costs’
• This kind of refinance can help keep homeowners from owing a hefty bill all at once, making it possible to refinance if they don’t have a lot of cash on hand.
• Depending on the terms of the loan, not paying a large sum upfront may mean you break even on the refinance more quickly.
Drawbacks of a ‘Refinance Without Closing Costs’
• The closing costs may be compensated for in the form of a higher interest rate, which can be costly over time.
• If the closing costs are added to the principal loan balance, borrowers may end up paying more interest over the life of the loan than they would have if they’d paid closing costs upfront.
Is a No Closing Cost Refi Right for You?
If you stand to save a significant amount of money by refinancing your home—and if you’ll be in your home long enough that you’ll break even on the refinance, even with closing costs factored in—it might be worth footing the elevated interest rate or higher loan principal that come along with a no closing cost mortgage refinance.
For those who don’t have the cash on hand to pay for closing costs upfront, this approach is the only feasible way to achieve a refinance at all.
If, however, you have the option to pay closing costs upfront, doing so can help keep the loan less expensive over its lifetime.
Although it’s called a no closing cost refinance or no cost refinance, these mortgages don’t let a borrower off the hook. Closing costs are either added to the principal or exchanged for a higher interest rate.
While a no closing cost refinance can make refinancing possible for those who can’t pay for closing costs upfront, it’s important to look at the life of the loan and your plans as a homeowner to ensure it’s an approach that makes financial sense.
If refinancing seems right for you, SoFi offers a line of mortgage refinance options, including cash-out refinancing, all at competitive interest rates. While the loans aren’t free of closing costs, SoFi is transparent about them, and members save on processing fees.
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