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What is a No Cost Refinance?

December 19, 2012

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No cost refinancing refers to a loan program in which a homeowner refinance the rest of their mortgage balance without having to pay any fees or closing costs upfront, at closing. People look for no-cost mortgage refinance loans if they want to avoid paying any up-front costs. Getting low or no fees on a refinance loan is particularly important if you plan to get another loan in the future, or if you don’t plan to live in your home for the lifetime of the loan. This means that when you refinance, you should always look at the true cost of the loan over its life, including fees.

Heres how it works

Some people argue that there’s no such thing as a “no cost loan,” and they aren’t exactly wrong. All loans produce a certain amount of work and risk for the lender. In order to make it worth their while, lenders charge interest, fees and closing costs. These costs typically include title search, title insurance, courier fees, recording fees, attorney fees and so on. In a no cost refinance, the lender foots the bill for these fees, but charges you a higher interest rate to make up for it.
So, is it worth it? 

It’s important to carefully evaluate your situation and the potential overall savings before plunging into a no cost refinance. If you think you can pay off the loan in a few years, the no cost refinance can be a great deal. If paying off your mortgage in such a short period of time is unrealistic for you, then you’ll want to compare the costs of a traditional refinance with the no cost version.

Keep in mind that at some point (if you carry the loan long enough), the extra money you’re paying due to high interest may surpass the amount you would have paid if you had just paid the closing costs yourself. You’ll need to figure out what is more important to you: paying less over time or paying nothing up front.

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