When you take out some kind of borrowing like a mortgage or loan there are many choices on how to raise the finance and one option is to have a no closing cost refinance loan. Simply put, you can choose to pay the required closing costs when you first take out the loan or alternatively you can pay for them throughout the life of the loan.
This method of finance agreement is known by many different terminology but all essentially mean the same thing. You may have heard of “no fee refinances”, “no cost mortgage refinances”, “no cost refinance loans” or sometimes “no cost refinances”. These terms often provoke confusion but be assured they all allude to the same thing – a mortgage refinance agreement which has very small closing charges.
So what are the usual costs that one would have to normally pay with a traditional refinance mortgage?
There are many charges associated with a regular mortgage refinance agreement such as title insurance title search, courier fees, recording fees flood certification fees together with attorney’s fees to name but a few. Even the settlement and closing costs for a no-points loan can accumulate to several thousand dollars. The fantastic advantage with a no closing cost refinance loan is the lender absorbs the charges for the above expenses and in turn does not increase the loan balance. This is ideal for those that are not fortunate enough to have a large pot of cash for expenses when trying to find the funds for a property.
Be aware however, of the charges that the lender will not cover. Usually, a no cost lender will not pay out for sums of money that are associated with escrow fees, homeowners insurance that is prepaid, prepaid interest on the new loan or prepayment penalties on your old mortgage. Incidentally the reason for the pre-paid interest is when a new mortgage is closed on a day that is not the first of the month. The interest will need to be paid for the time between the closing date and the first mortgage payment date.
Although the no closing costs refinance seems you have been given free money you need to be aware that this has to be paid for somewhere. There will be a higher interest charge on the loan so the lender can recoup the money back that they have spent out on your behalf.
Why is no closing cost refinance a good deal?
Where this kind of loan is a good deal is when the amount that was borrowed is paid off or refinanced in less time that originally planned for. This is realized if you compare payments of a traditional refinance deal against a no cost fee refinance package. The no cost loan will eventually add up to an amount that is more than what you would have paid in closing costs upfront. Therefore, if the amount is paid off before this crucial break-even point you’ll find that the no closing cost refinance will really save you money. If you don’t pay it off of course, it will cost you more.
There are other reasons why the no fee refinance is beneficial. If you can get a competitive interest rate or fixed rate but plan to invest your money elsewhere then this no fee kind of refinancing may be the best borrowing deal for you.