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Does Refinancing With No Closing Costs Make Sense

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Real Estate Agent with RE/MAX Executive Realty 91362

What to Know About No-Closing Cost Refinancing

Are you looking to refinance your mortgage with no closing costs or points paid to the lender? The term “no-cost refinance” refers to a loan system whereby you won’t have to pay out-of-pocket charges such as closing costs when refinancing a mortgage. However, you’ll still have to incur the borrowing charges that the lender will add to your principal payment or replace them with a higher interest rate.

Since the concept of no closing cost refinancing may seem complicated, here is a comprehensive guide on zero cost refinance, its benefits, and drawbacks. You will also learn when to consider a no-cost refinance mortgage.

Maximum Real Estate Exposure has put together one of the most in-depth resources explaining what to know about a no closing cost refinance.

Let's take a deep dive to determine if refinancing this way makes sense for your current financial circumstances.

How Does Zero-Cost Refinancing Work?

When refinancing a mortgage loan, you’ll have to pay off your current loan and acquire a new one almost immediately. During this process, you’ll have to incur closing charges that can be approximately 2-5% of the principal loan amount.

Such costs help to pay for title search and documentation fees. No-closing-cost mortgages help you avoid upfront fees, and you can acquire one if you meet the set lending requirements. No-cost refinancing works in several ways, and these include:

Increasing The Mortgages Interest Rate

The financial institution providing the mortgage may decide to replace your upfront fees with a higher mortgage interest rate.

Some potential homebuyers prefer this option because it saves them from paying lump sum upfront fees. This way, lenders can cover refinancing expenses such as closing costs while also attracting more individuals to mortgage loans.

However, some high interest rates may result in the financial institution recouping more than if you paid the upfront fees, meaning you may end up paying higher mortgage charges.

Adding The Fees to The Principal Mortgage Amount

The financial institution may transfer the no-cost refinancing charges to the principal amount that you should repay. Although this form of refinancing is a different approach from raising the interest rate, it also results in a higher payment.

The Benefits and Drawbacks of No-Cost Refinancing

Benefits of No-Cost Refinance

1. You won’t have to pay upfront mortgage expenses such as origination, title search, credit check, and real estate appraisal fees.

2. Since you’ll avoid the upfront fees, you can break even more quickly.

Drawbacks of No-Cost Refinance

1. Choosing a zero-cost refinancing option can lead to higher principal loan amounts meaning you’ll pay more, particularly if you plan to own the home long-term. This higher payment may be in terms of increased monthly charges or interest rates.

2. Financial institutions may introduce a prepayment penalty clause to your refinancing agreement. Such a penalty can discourage you from refinancing your mortgage before the lender recoups the upfront fees. It should be noted, however, that most lenders do not include prepayment penalty clauses.

When Should You Consider Doing a No Closing Cost Refinance?

Depending on your present situation and plans, you can decide whether you need zero-cost refinancing on your mortgage. For instance, if you plan to move into a different home soon, this refinancing option may be best for you.

You’ll break even in 2-3 years, and you can still have some savings since you won’t have to pay the mortgage upfront fees. Additionally, it might be better to take out a zero-cost refinance if you don’t have enough savings to cover the upfront fees.

However, since no-cost refinancing interest rates are higher, it may not be best for individuals who plan to stay in a house for extended periods such as decades. In such cases, you may find that you’re paying more than the original closing costs over time.

When acquiring a zero-cost refinancing option, it is always essential to remember that your payments will be higher than if you paid the closing costs.

If you wish to make a wise refinancing decision, kindly conduct financial research by asking your lender about their interest rates, payments, and closing fees. Additionally, learn about the cost differences between the zero-cost refinancing option and one where you pay the closing expenses. Also, try to know how long it might take for you to attain the break-even point.

It's also worth noting that your credit score will play a role in the interest rate you receive from the lender, like in other financing situations.

Final Thoughts

No closing cost refinancing can help you avoid high upfront fees when you decide to refinance your mortgage. However, not all financial institutions offer a no closing cost option during the refinancing of mortgage loans.

Only several financial institutions openly advertise this refinance option. Some lenders will offer it but don't regularly advertise as such.

If you plan to acquire a no-cost refinance, kindly consider if it’s best for you and conduct proper research to identify a financial lender who will give you an excellent deal. No-closing cost refinancing will not work best for everyone, but it is the right financial move for some people.

Hopefully, you now have a better understanding of when refinancing this way makes sense.

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With three decades of experience, Bill Gassett is an authority in the real estate sector. Bill writes informative articles for numerous prestigious real estate sites to help buyers, sellers, and fellow real estate agents. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Placester, Realty Biz News, Credit Sesame, and his own authority resource, Maximum Real Estate Exposure. Reach out to Bill Gassett for his real estate, mortgage, and financial expertise.

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