Reconsidering Mortgage Refinancing: No Closing Costs, More Considerations
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When it comes to reviewing your mortgage at some point in the future, you may want to reconsider refinancing for a number of reasons. For example, taking advantage of home equity, bundling debt into one payment or enjoying lower interest rates could all be driving motivators.
But honestly? The expensive closing fees are what makes most people run from refinancing their homes. Sure enough, a simple refinance can yield lower monthly payments – if you don’t consider those closing costs and wonder whether the benefits outweigh them. You can start by checking out online possibilities for mortgage refinancing offered by different banks or lenders.
Let’s talk about “No-Closing-Cost” Refinancing for a second here. This offer by some financial institutions has its own set of pros and cons that come with it too; no upfront closing costs means you can still refinance your mortgage without having to pay anything — this is not just some marketing trick. However, in exchange for this apparent convenience comes higher regular mortgage payments instead. If this strategy still appeals to you at all though, just do a search on Google with keywords like ‘lenders specializing in no-closing-cost mortgages’ so as find some lenders who can help with such loans.
Understanding a No-Closing-Cost Refinance
Here, let’s dispel the myth. A no-closing-cost mortgage refinance is when you refinance your current home loan without paying the closing charges up front. That being said, these fees aren’t exactly waived either; they’re rolled into or paid by way of higher interest rates on your new loan.
Suppose you want to borrow $250k for refinancing purposes on an existing residential property valued at $500k (equity withdrawal). A typical transaction of this size would normally incur between $2,500 – $6,000 worth of fees called “closing costs” which are charged by lenders during the application process i.e. when you fill out forms etc., before they approve or deny your request for credit facilities such as mortgages, etc.
Evaluating The Costs
Remember what it was like paying closing costs when you first bought a house? Get ready to do it all over again because most of these fees are exactly same. Budget between 2% – 6% of your current mortgage balance should be enough money saved aside specifically earmarked towards paying for those dreaded “closing fees” whenever they become due; along with new building inspection/home appraisal which might have to be done before lender grants approval i.e. if a different property is being used as collateral.
The loan origination fee is typically charged as a percentage of the mortgage amount and falls within the range of 0.5% – 1%. Title fees can also add up quickly depending on where you live; any associated VA funding fees apply here too; mortgage insurance is often required unless there’s been at least twenty percent down payment made toward purchase price.
Some miscellaneous expenses could include credit report fees and other charges that come with applying for new loans even though everyone knows how good our credit scores are already!
Bigger Interest Rate: A $250,000 mortgage is the base for this example. To get a 2.9% interest rate, you pay all of the closing costs. That’s a $1,997.79 monthly payment (not counting mortgage insurance and property tax). But if you go with a loan that has no closing costs, you’ll see an interest rate increase to 3.75%. Your monthly payment will go up to $2,101.39 per month — that would cover the entire closing cost in just 50 months or so, which is an extra $100 a month.
Higher Loan Balance: Another option is to roll your closing costs into your total loan amount — but it also means spending more over the life of the loan. In this example, that same $250,000 mortgage at 2.9% on a 15-year term would come with monthly payments of $1,997.79 each for a total of $359,602.20 over the life of the loan. However, if we add the additional $5,000 in closing costs onto the loan amount itself then our new monthly payment would be something around $2,032.08 — and over those same 15 years we’d wind up paying a grand total of about $365,774.40 toward our mortgage. So now instead of just under five grand in closing costs … they’ve become north of six grand.
When Does a No-Closing-Cost Refinance Make Sense?
In short: Almost never. A no-closing-cost mortgage refinance almost always winds up costing you more money down the road than what you saved upfront – unless you’re planning to move again before long. From here on out we’re going to refer to these things as “home loans” because it can be either refinancing or getting pre-approved for a purchase.
In some cases it might make sense for one of these. If you’re planning to move again within the next five years, refinancing isn’t going to pay for itself in original costs. Secondly, (and this is a rare case) if you are qualified for a mortgage but don’t have enough money saved up for closing costs – then it’s your only option. There are other factors too: Home equity may need to be leveraged because cash needs to be accessed immediately due to financial difficulties. When there’s no money and there’s no way to pay the closing cost, sometimes that’s just what has to happen.
Another one would be if the interest rate on our first mortgage was way higher. Imagine getting that first mortgage five or 10 years ago when your credit wasn’t as good and you had to pay a higher interest rate. Now you can qualify for much lower, say 2.9% instead of 4.9%, based on your improved financial situation. Even with rolling in closing costs into principle amount — total interest savings over the course of the loan will outweigh costs monthly.
The Decision
This is where we land after taking all of that into account: No-closing-cost refinances do have higher long-term costs — we said this already though there are some cases when they can make sense. Whether or not this makes sense depends on your home’s worth, current mortgage balance, credit score and individual financial circumstances; however generally speaking it works out better financially if you pay those charges at signing.
For a lot of people who may not have $5,000 in cash laying around … paying closing charges at signing might sound like a pipe dream. If you’ve been afraid to refinance due high close expenses, there may be no-cost options available; check with few local banks and/or mortgage providers.
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