Rate is the one word that comes up perhaps more than any other when shopping for a mortgage loan. The second most frequent topic of discussion is on closing costs – the dollar amount it takes to get a mortgage done. There’s an appraiser that needs to be paid, underwriters that need a paycheck, and a title company that has to do the required title work. Yes, they need to be paid for this work, too. Recording fees, credit reports, transfer taxes, etc – you get the point. There are costs to getting a loan, whether you’re buying a new home or refinancing an existing mortgage.
So how do lenders offer “no closing cost refinance” loans? Do these costs just disappear into thin air? Nope. The reality is that no closing costs loans are typically loans with higher interest rates – rates high enough for the final investor to offer a dollar amount credit that pays for all of the closing costs. In simple terms, the lender pays the costs up front for a higher rate, and higher profit, in the long run. Doesn’t sound like too good a deal for consumers, does it? Actually, in a market where rates are going down, no closing cost refinance loans are one of the most savvy tools a consumer can use to save money both short and long term.
So how does it work?
Well, in a market where rates are declining, borrowers will be more inclined to refinance their current mortgage – if they do so using a no closing cost refinance, there’s little risk that they’ll lose money on closing costs. In other words, if they pay closing costs for a lower rate, then refinance again if rates continue to drop, it’s likely they won’t have recouped all of the closing costs from the initial refinance through their monthly savings. Let’s say the initial refinance costs $3500, and the monthly savings for the borrower was $50. To recoup that $3500, the borrower would have to hold their loan for 70 months, or nearly 6 years. If they refinance any time before that, they’ll have lost money. A no closing cost refinance eliminates that risk. Even if the rate for the no closing cost refinance is a little higher – let’s say the savings is only $25/month – with $0 closing costs, even if a borrower only has the loan for 2 years, they’ll have saved $600.
In today’s market where interest rates are dipping, a no closing cost refinance option can be a simple and risk-free way for home owners to save money. With today’s mortgage process being much easier than it was a few years ago for most borrowers, the process itself is also much more streamlined, making the incentive to save money bigger as the process is faster moving and less costly from a time standpoint.
While rate is certainly an important consideration, along with the term of your loan, a no closing cost refinance can eliminate the risk of paying double or even triple closing costs in a market where rates decline substantially. Nobody knows where the bottom of the market is, or what the lowest rate will be, but if the savings make sense, and you can get those savings without costs, a no closing cost refinance can be a great way to improve your loan and save you money.
Want to see if a no closing cost refinance loan would be the best option for you? Ask one of our experts today!