Homeowners, for a variety of reasons, sometimes need to finance their homes, often in order to stay financially afloat. The barrier for many of them is the closing costs, which can be a pretty hefty sum. There is, however, a way to refinance without having to pay closing costs – a no-closing-cost refinance. To determine whether this refinancing option is right for you, read on to see how to refinance your home without any closing costs.
How No-Closing-Cost Refinancing Works
The instrument for refinancing your home without any closing costs is what is termed a no-closing-cost refinance. But although you don’t pay any closing costs up front, those costs don’t simply vanish.
As industry pros explain, “a no-closing-cost refinance is a refinance where you don’t have to pay closing costs when you get a new loan. But just because there are no upfront costs doesn’t mean that your lender foots the bill for free. No-closing-cost refinances don’t get rid of a borrower’s expenses; they only move them into your principal or exchange them for a higher interest rate.”
If you refinance with upfront closing costs, you typically pay 2% to 5% of your principal balance. This amount covers appraisal, title search, recording fees, and so on. With a no-closing-cost refinance, these fees are packaged into the loan in one of two other ways . . .
- Higher interest rate – “The lender may cover the expense of no-closing-cost refinance by raising the mortgage rate on the loan. That way the lender will recoup the closing costs, and possibly much more over time while enticing more loan business.”
- Fees wrapped into financing – “The lender may roll the ‘no-cost’ refinance fees into the total principal balance you’ll owe. It’s a different method with the same result: a higher payment, as the fees plus interest are paid over the life of the loan.”
The Benefits of Refinancing with No Closing Costs
There are some solid benefits to refinancing with no closing costs.
It can “allow you to keep your refinance plans on track. If you’re planning to refinance and you need money to cover a sudden bill, a no-closing-cost refinance can actually save you money. Interest rates on mortgages are usually lower than home equity loans, which means that even if you take a slightly higher rate, you may end up paying less compared to another type of loan.”
This kind of refinancing is especially beneficial if you plan to stay in your home only a few years (say, less than five years). You get to avoid paying closing costs in one large lump sum, and you’ll sell your home before you pay the extra thousands in higher interest that you’d over the life of the loan.
So the two main benefits are:
- No fees paid up front
- A shorter break-even point
(If this sounds a bit confusing, contact your agent for a fuller explanation. Just call 443.261.6441 to find out more.)
When to Choose This Option
But how do you know if this refinancing option – without upfront closing costs, but with higher monthly payments – is right for you? It hinges mostly on one condition . . .
If you plan to sell and move fairly soon, the “no-closing-cost mortgage refinance may be for you. If you plan on staying in a home for just a couple of years, you probably couldn’t recoup in refinance savings the upfront fees you’d pay anyway. And it’s the only option — other than waiting to buy — for those who simply don’t have the savings to cover all of the upfront closing costs.”
But keep in mind that not every lender offers this refinancing option, so you’ll need to shop lenders. Your can also give you some direction here.
How to Decide
So to make the final decision to refinance your home without any closing costs, you’ll need to figure out exactly how long you plan to stay in the home. Then the next step is to run some numbers.
Here’s what industry experts advise in this regard: “[A]sk the lenders you are considering to provide an analysis of the closing costs, as well as the difference in interest rates and payments for a no-closing-cost refinance compared to a loan with upfront fees. With an application, each lender will supply an official Loan Estimate detailing the costs and terms they’re offering. You can also compute the ‘break-even’ point for how long it would take to recover the closing costs on a loan and compare that against the no-closing-cost mortgage.”
Just Don’t Go It Alone
As you can tell, it takes some thought and careful calculations to make sure a no-closing-cost refinance is the right refinancing option. That’s why most people are far better off with some expert help, including that of your local agent. While your isn’t a financial advisor, she can, nevertheless, point you in the right direction and provide some valuable insights. If you’re interested in refinancing your home without any closing costs, be sure to contact us today at 443.261.6441.