If you can find a lender that offers you a no closing cost refinance, you will probably want to consider it. Even a slight reduction in the interest rate will benefit you if the costs are truly zero. Local Mortgage offers a variety of refinancing options, including options with no closing costs.
How it works
A no cost refinance is one where the lender is paying all of the fees for your refinance. This includes their lender fees, appraisal fees, the title fees including title insurance, recording and transfer taxes.
Don’t confuse no closing costs with no out of pocket costs. If you are paying closing costs, you have the option to roll those costs back into the new loan amount. For example, if you have a current balance of $200,000, you can increase the new loan amount to cover the existing loan balance plus any related costs. This may leave you bringing no money to closing, but you would be financing the costs by increasing your loan balance. In a true no cost refinance, there would be no fees added to the current loan balance.
Advantages
When you are lowering your rate without paying closing costs, you immediately receive the benefit of the interest savings. If paying costs, you need to determine a breakeven point. Prior to the breakeven point, you are simply recouping your costs and won’t realize true savings until after the breakeven point. However, with no costs, there is no breakeven point so you start to realize the savings immediately.
Another advantage of a no cost refinance is that if rates were to continue to fall after you close, you can refinance again without losing money. As mentioned above, if you pay closing costs you are creating a breakeven point so if you were to refinances prior to the breakeven point, you would lose the costs you paid less any amount recouped through monthly savings. Using a no cost refinance allows you to move your rate down if the rates continue to fall.
Disadvantages
The rate you receive for a no closing cost loan is generally slightly higher than one you would receive if you were to pay the costs. The lender is using their excess revenue generated from the higher rate loan to apply to your closing costs.
Escrows
Keep in mind, you will still need to re-establish your escrow account if you escrow for taxes and insurance. These are not considered costs as they are items you would pay as the homeowner even if you did not carry a mortgage. You can choose
to roll in the escrow amount to the new loan or pay them out of pocket. Paying them out of pocket is the best move in terms of interest savings. Keep in mind, if you have a current escrow account, that money will be refunded to you within 30 days of paying off your current lender.
Start Your Mortgage Calculations with Local Mortgage
If you are looking to refinance and would like to discuss your particular situation, feel free to contact a Local Mortgage Loan Officer. Our team of experts is here to help you through the process and help you determine what type of refinance is right for you.