Closing costs associated with getting a mortgage is pretty much a given. There are closing costs from multiple parties beyond what your mortgage company may require. Your lender might have a loan processing fee and an underwriting fee among others. Your lender may also ask that you pay for an appraisal and credit report upfront and if for some reason your loan doesn’t close, those funds for an appraisal and a credit report might not be refunded.
Your lender might have a loan processing fee and an underwriting fee among others. Your lender may also ask that you pay for an appraisal and credit report upfront and if for some reason your loan doesn’t close, those funds for an appraisal and a credit report might not be refunded. There are fees for title insurance, recording charges, escrow fees and settlement charges. And these are just a few. And when you refinance an existing mortgage, you’ll encounter these and other similar charges as well. But maybe you don’t have to pay for them this time around.
Have you heard of a “no closing cost loan?” Your probably have. But when a mortgage company produces an ad or a marketing campaign touting a no-closing-cost loan, it’s not really a unique offering. Most any lender can offer the same. Yet it depends upon certain aspects of the loan in order to accomplish a refinance with zero closing costs, primarily the loan amount and the total amount of costs needed to close the refinanced mortgage.
But the concept of a no closing cost loan needs to be clarified. There really is no such thing as a no closing cost loan. There are costs involved and borrowers can’t get around them. If you don’t pay for a third party service needed to close your loan, your loan won’t close. A title insurance company won’t issue a new policy for free, right? There are closing costs, it just depends who pays them and how.
The first step to see if you can refinance a mortgage without any closing costs is to get a solid estimate from your loan officer about what the closing costs will add up to. This is a relatively easy step and can be done over the phone or via email. Your lender will want to know your current mortgage balance and the type of loan you’re seeking. If you want to refinance from a 30-year mortgage to another with a lower rate, the loan officer will apply current market rates to your situation and provide you with not just your new monthly payment but your closing costs as well.
A Little Math
Generally, a refinance can make sense if the benefit of the new, lower monthly payment is enough to offset the closing costs needed in a reasonable period of time. Let’s say a mortgage payment drops by $100 and the closing costs add up to $3,000, it will take 30 months before the borrowers see the true benefit. That’s not an unreasonable period of time as long as the borrowers keep the mortgage for at least that long.
This is also why paying discount points to get a lower rate when refinancing might not make sense, either. When you pay a discount point or a “point,” you’re paying the mortgage company additional funds in exchange for a lower rate on your loan. Generally, when you pay a point or one percent of the amount borrowed, you’re lowering a 30-year rate by 0.25%. Let’s say you’re borrowing $300,000 and a 30-year rate without any points is 3.25%. the principal and interest payment is $1,305. You ask about paying a point to get a lower rate and the new rate is 3.00% with a monthly payment of $1,264 for an additional savings of $41. Not bad, really, but when you consider the fact you paid another $3,000 for the lower rate, it would take $3,000 divided by $41 = 73. That’s 73 months it would take before you would see the advantage of the lower rate.
Now hold that thought.
Higher, Not Lower
Let’s take that same mortgage of $300,000 and instead of lowering the interest rate, the rate is adjusted slightly higher. Let’s say the rate for the refinance is 3.50% instead of 3.25% without points. In this manner, the mortgage company now has a one point credit, or $3,000, that can be used to pay for all or some of your costs. If closing costs on this transaction are in fact $3,000, the closing costs will be credited at the closing table.
This is where the loan amount comes into play. There are fixed costs involved with a refinance regardless of the loan amount. For example, a credit report fee or loan document charges could be the very same with a loan amount of $100,000 or $300,000. If closing costs on a refinance are $3,000 on a $100,000 loan, there would be only $1,000 available for a closing cost credit by adjusting the interest rate on a 30-year loan.
But the misnomer needs to be addressed. There really isn’t a no closing cost refinance. There are costs and the costs are reflected each month with the higher payment. That’s why you need to work closely with your loan officer to see if a slightly higher rate in exchange for a closing cost credit makes sense in your situation.
One final note. Don’t confuse a no closing cost refinance with coming to the settlement table with little, if any, cash to close. Unlike a purchase loan, you can roll in your closing costs when refinancing given sufficient equity. If your closing costs add up to $3,000 and you decide to refinance a loan amount of $303,000 instead of $300,000, you’re not coming to the closing table with any cash of your own. But there are costs and they’re rolled into your loan amount.
Your loan officer can offer multiple scenarios regarding how to address your closing costs. There may be a credit available. You may decide to roll some of the closing costs into the loan and obtain a lender credit for the remainder. If your refinance can provide enough credit to refinance a mortgage with absolutely zero closing costs, it’s something you need to consider. There are always costs associated with a loan- it’s just who pays for them and how.
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