May Come With Hidden Fees
In exchange for covering your closing costs up front, some lenders may charge an additional fee for this service. You might miss this fee because its hidden inside the other costs of your mortgage. This is why its important to read your Loan Estimate and Closing Disclosure to ensure you know exactly what fees are rolled up into your closing costs.
You know that saying, “Theres no such thing as a free lunch?” Well, think of no-closing-cost refinances like that. They can be a great financial tool in certain situations, but the closing costs arent free. Youll always have closing costs when dealing with loans and lenders, which is why many financial experts encourage borrowers to think of a no-closing-cost mortgage as a “delayed closing cost” mortgage instead.
Finding a great mortgage refinance rate could help offset the cost of common closing fees. You can compare mortgage refinance rates with Credible.
Whats Included In Refinance Closing Costs
The closing costs of a refinance can be different for different homeowners. Closing costs vary because of factors such as property location, loan type, and loan amount. Some of the closing costs you may need to pay when you refinance a mortgage include:
- Lender fees. These are the fees lenders may charge to process your refinance application . These fees can vary from lender to lender.
- Mortgage Discount Points. These are fees some lenders may charge you to get a lower interest rate. For example, a lender may offer you a 2.75% interest rate but charge you discount points to get it. One mortgage discount point is equal to 1% of the loan amount. You can often choose to pay discount points to get a lower interest rate too.
- Mortgage Insurance. When you refinance with a conventional loan, you will most likely need to pay for private mortgage insurance if your home equity is less than 20%. You will mostly likely need to pay an upfront mortgage insurance premium when you refinance an FHA loan.
- Funding and Guarantee Fees. VA and USDA refinances dont have mortgage insurance but they do have funding or guarantee fees you will most likely need to pay.
- Homeowners Insurance and Property Taxes. You may need to pay hazard insurance premiums and property taxes as part of your closing costs.
When Does A No Closing Cost Loan Make Sense
Even though a no closing cost loan can potentially be a more expensive refinance option, there are some situations where its the best choice for the homeowner. If youre not planning to stay in the home long-term a no closing cost refinance may be a good bet. The higher your rate is, the longer itll take for you to break even but that may not be a concern if you dont think youll stay longer than five years.
If you think youll refinance again at some point in the future, taking the no closing cost option is a smart choice if youre looking to free up some cash in your budget. Using the money youre saving on closing costs to fund some home improvement projects can give your equity a boost and add up to major savings when its time to refinance again.
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When youre considering a refinance, its easy to focus on the small details but you really need to pay attention to the bigger picture. Taking out a no closing cost refinance loan may yield some immediate out-of-pocket savings but it could end up being much more expensive in the long run.
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Option : Roll Closing Costs Into The Loan
Rolling the closing costs into the new loan means adding them on to the loans principal. While the lender may offer you the same interest rate as if you were paying the closing costs out of pocket, this option will still increase your monthly payments and lower your total savings.
Using the same $250,000 mortgage scenario as above, assume that you roll the $5,000 closing costs into the new 3.2% mortgage. By choosing this option, you would reduce your monthly payments by $120 compared with your old mortgage. Thats $21 a month less of a reduction than if you paid the closing costs out of pocket.
While all of these scenarios show that you can save some money on your monthly payment by paying closing costs out of pocket, you either may not have that much cash on hand or may have other uses in mind for it. Another way to look at the situation is how long it will take for the money that you save each month to add up to the amount that you spent on closing costs. For example, if you reduce your monthly payment by $141, as in the example above, then it will be just over 35 months, or about three years, before your savings come close to $5,000.
Should You Pay Refinance Closing Costs Out Of Pocket
Take a close look at your financial situation when deciding the best way to pay your refinance closing costs.
If you have sufficient home equity, it might be worthwhile to add your refinance closing costs to your mortgage balance to avoid an out-of-pocket expense.
This also makes sense when you dont have much money saved, or if you dont want to deplete your personal savings when refinancing.
However, rolling closing costs into your loan increases the loan balance, your monthly mortgage payment, and your total interest charges. So if you can spare the cash, it might be better to pay your closing costs out-of-pocket and be done with it.
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Can I Refinance My Mortgage With No Closing Costs
Every borrower wants to save money when they’re refinancing their mortgage, often by securing a lower interest rate that drives down their monthly mortgage payments and saves them thousands over the life of the loan.
But does a no-closing-cost refinance fit into the money-saving category? Sure, this type of refinance might sound appealingafter all, the average closing costs for a single-family home in the U.S. were $5,749 in 2019, according to real estate data firm ClosingCorp. Yet even though a no-closing-cost loan lets you refinance without any upfront fees, it could very well trigger a rise in your interest rate or loan balance. That, in turn, could cause your monthly mortgage payments to climb and increase the total cost of the loan.
That said, a no-closing-cost refinance might be a good option if you don’t have enough money saved up to cover the closing costs or you’d rather spend that money on a home remodeling project.
Read on to understand the ins and outs of no-closing-cost mortgage refinance loans.
Conventional Loan Appraisal Waiver
If you have a conventional mortgage that youâd like to refinance, the lender might be willing to waive the appraisal requirementâfor example, if the home was recently appraised or if youâre an excellent candidate for refinancing. Qualifying for an appraisal waiver means that your lender along with Fannie Mae or Freddie Mac agree that an appraisal isnât necessary.
Unfortunately, most borrowers donât qualify for an appraisal waiver. But the stronger your application is, the better your chances of getting approved for a waiver. This typically means having a good to excellent , stable income and a good amount of equity in your home. Keep in mind that your lender must start the appraisal waiver processâso if youâre interested, be sure to ask your lender how to qualify.
Also note that your eligibility will depend on the type of property you have, the loan-to-value ratio and the combined LTV ratio. The LTV ratio is the amount of the mortgage divided by the appraised property value, while the CLTV ratio is calculated by dividing the balance of all outstanding loans on the property by its current market value. Lenders generally consider loans with higher LTV and CLTV ratios to be riskier investments.
Fannie can consider appraisal waivers for:
Freddie can consider appraisal waivers for:
- No-cash out refinances for primary residences or second homes up to 90% LTV
- Cash-out refinances for: Primary residences up to 70% LTV and second homes up to 60% LTV
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Average Closing Costs When Refinancing A Mortgage
You probably remember paying a bunch of closing costs when you first bought your house. Unfortunately, a mortgage refinance requires a lot of the same costs. You should budget roughly 2-to-6% of your current mortgage balance as closing costs in order to refinance. Your lender may need a brand new house appraisal and/or building inspection. Youll be paying for those things too.
There are also legal fees included in closing costs. There is the:
- Loan origination fee for roughly 0.5-to-1% of the mortgage amount
- Title fees
- VA Funding Fees if applicable, and
- Mortgage insurance, which is required on most mortgages unless you have 20% down payment on the purchase price of the house.
You may even need to pay smaller credit report fees. Lenders will need copies of your credit report to ensure your creditworthiness. Yes, even though you already have a mortgage, you need to prove youre worthy of a new one.
What No Closing Costs Really Means
When a mortgage refinance comes with no closing costs, consumers should be wary. Thats because there is actually no such thing as a cost-free mortgage refinance. It requires a variety of billable administrative research and work to complete:
- Recording Fees
- Third party verification fees
The homeowner can pay these costs at closing, or the costs can be integrated into an ongoing payment plan. When a mortgage refinance has no closing costs, the fine print may require higher interest rates to cover what you would normally pay at closing.
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Why Choose A No
The lure of refinancing right now is powerful with interest rates hovering near historic lows. But there is a potential downside to refinancing: The cost, as closing costs on a refinance typically run about $4,000. The good news: You can score a no-closing cost refinance.
With a no-closing cost refinance, you wont have to pay thousands in upfront closing costs for things such as appraisal, underwriting and processing fees the mortgage company will waive them.
Sounds great, right? Well, theres a catch: Just because there are no upfront costs associated with the refinance doesnt mean it wont cost you.
Are There Drawbacks Of Refinancing Without An Appraisal
In addition to saving you a few hundred dollars, skipping an appraisal can hasten the time it takes to close the deal and prevent a low appraisal from ruining your chance to refinance. However, paying for an appraisal can also be a good idea, even if you have the option for a no-appraisal refinance.
If you believe your home has increased in value, a higher appraisal might help you qualify for refinancing with a better interest rate because your LTV ratio will be lower. The savings from even a small decrease in your new mortgage’s interest rate could more than offset the cost of the appraisal. Or, if you’re looking for a cash-out refinance, you may qualify for a larger loan based on your home’s high value.
You may also benefit from an appraisal if you’re paying for private mortgage insurance . Once you have 20% equity in the home, you may be able to save money by canceling your PMI coverage. If you’re already at that point based on your home’s current value, getting it appraised before refinancing could help you get rid of the PMI.
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To Add On A Spouse/partner
If your original reverse mortgage did not include your spouse or partner, you could refinance in order to add them on. Otherwise, if you die or have to move into a care facility, your spouse could end up losing the home if they cannot pay off the reverse mortgage balance.
On the other hand, there are some situations in which a reverse mortgage refinance may not be a good move. Some examples of these include:
More Expensive Over Time
A no-closing-cost refinance might sound enticing, but youll often pay for the transactional ease via a higher interest rate or higher monthly payment. As such, youll end up paying more for the loan over 15 or 30 years than if youd paid for the closing costs up front.
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How Refinancing Your Home Can Affect Your Credit
Refinancing can impact your credit scores in several ways, as you’ll be paying off your old loan and applying for and taking out a new one. Overall, however, the impact may be minimal.
Applying for a refinance loan can lead to a hard inquiry, which may hurt your credit scores a little. Additional applications that cause more hard inquiries could increase that negative impact, but multiple hard inquiries for the same type of loan will only count as one hard inquiry if they occur within a 14- to 45-day period . This means you’re still able to rate shop to try and get the best rate.
The new loan will also decrease the average age of your accounts, which could hurt your scores a little. Your original mortgage will be paid off and closed, but your payment history on that loan can continue to help your credit, as the account will stay on your credit report for up to 10 years. Continuing to make your payments on time on the new loan can also help your credit.
Make sure a mistake or delay during the refinance process doesn’t lead to you accidentally missing a payment on your original mortgage. Otherwise, a late payment could be reported, which could lead to a large score drop.
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Rate Adjustment On No
One way the closing costs get re-allocated is with a rate adjustment. If you dont pay closing costs, your rate will be higher.
How much higher depends on your loan amount. The lower your loan amount, the higher the rate adjustment will be to cover your closing costs. In general, you can expect your rate to be between .25 percent and .5 percent higher if you go with a zero-closing cost mortgage.
For example, if you were refinancing a $200,000 loan with a zero-closing cost mortgage, you might pay a rate thats .375 percent higher than if you paid the closing costs. This means your monthly payment would be $42 per month higher for the life of the loan but youd conserve about $3,000 in costs at closing.
What Types Of Homeowners Benefit Most From No
A no-closing-cost mortgage wont be the right fit for everyone, but certain borrowers can benefit. In particular, it can be helpful for first-time home buyers and borrowers who are only planning to live in their homes for a short period of time.
First-time homeowners can benefit from this arrangement because it can help free up their cash flow to go toward other expenses.Its ideal for anyone with limited access to cash.
If you dont plan on staying in your home long-term then you may benefit from a no-closing-cost mortgage as well. Thats because you wont stay in the loan long enough to pay the full 30-year mortgage.
This strategy will benefit borrowers who have high monthly expenses. Otherwise, it may be too challenging to make the monthly payments.
There are other options you can consider as well. For instance, it may be possible to have the seller pay for part of the closing costs as a concession.
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Can Closing Costs Be Waived
It is possible that a few of your closing costs may be waived outright. For example, in a competitive landscape, some lenders will waive certain fees, such as the application fee or origination fee, in order to get your business.
However, its unlikely theyll waive every fee, and you may still be left with costs that exceed the amount you want to pay. If this is the case, rolling the closing costs into your loan balance and spreading them out over time may be a smart option.
The Bottom Line: A Refinance Without Closing Costs Can Be The Right Choice
Financing closing costs over a longer period or paying them upfront each have their own benefits and drawbacks. Knowing what youre comfortable paying upfront and what your long-term goals are can help you decide which option is best for you.
When youre ready to explore refinancing options, were here to help! Start your application online today and talk to one of our Home Loan Experts to learn more. You can also give us a call at 326-6018.
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