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A no closing cost refinance can help you in a variety of ways. You might be able to lower your interest rate and lower your monthly payment or remove private mortgage insurance (PMI) if it’s applicable to your current situation.
You could potentially shorten the term depending on your long-term goals or conversely, you could do a cash-out refinance if you’ve gained equity in your home to gain some liquidity or pay for a large expense like college tuition, a wedding, or a vacation. All while having your lender pay for your closing costs.
Whatever your reason for changing the terms of your home loan, the closing costs associated with the new loan are going to be at the front of your mind. Here’s how you can leverage a no closing cost refinance to your advantage.
Before you refinance, you’ll want to take a good hard look at the interest rate available. If the interest rate has dropped, it can be a great time to refinance. You can completely revamp your loan, drop your monthly payment, and reduce the anticipated loan balance you’ll end up paying by the end of the term. Even if interest rates are higher, you could still potentially leverage a cash-out refi to improve your overall debt profile.
Before you commit to a mortgage refinance, there are a few other considerations you should review to see if the refi makes good financial sense. What will the lender fees be? Are there any upfront charges that you’d incur prior to closing? Will you lose any advantage you might have originally gained by buying discount points on your original loan?
If the numbers make sense, it’s time to think about how you’ll pay closing costs associated with refinancing your home. While these typically aren’t as steep as the closing costs you have to pay with a new mortgage on a home purchase, refinance closing costs can still account for a hefty bill.
Average closing costs can amount from 2% to 5% of your new loan’s principal balance. They include the appraisal fee, title search, any discount points you are buying, and lender fees such as a loan origination fee (tip: try to find a mortgage company that doesn’t charge lender fees!)
If you are refinancing into an FHA loan or doing a VA Streamline Refinance (IRRRL), you may end up paying a funding fee. Talk to your loan officer to see if the interest rate available warrants enough savings to justify the refinance.
An equity loan or home equity line of credit (HELOC) used to be a great way for homeowners to easily access the funds tied up in their homes. However, the interest rate for these types of loans or credit can be considerably higher than a standard conventional loan, and the monthly payment could eventually become burdensome due to the adjustable rates tied to HELOCs.
By choosing to do a cash-out refinance, you can simply increase your loan amount by the amount of equity you would like to net while securing a mortgage that should carry much better terms than a HELOC.
When you choose a no closing cost refinance, your lender will be paying your closing costs for you in the form of a lender credit. This allows you to refinance into a new mortgage without paying the typical hefty price tag of getting a mortgage.
This is different from when a lender charges your closing costs and rolls them back into your loan, which increases your principal balance owed. A true no closing cost refinance will not have the costs rolled back into your principal balance. They would just be paid by the lender via a lender credit at closing. The lender credit is fully disclosed at the outset of the refinance, so you would be able to see it in the paperwork right from the start of the transaction.
You are always welcome to choose a loan with closing costs, but you would then have to cover the costs by either rolling them into the loan or paying them out of pocket at closing. If you roll them into the loan, you’d be paying interest on the costs for the life of the loan. If you paid them out of pocket, the large amount of cash that you’d have to come up with could be burdensome.
If you’d like to get a mortgage, but don’t want the typical hefty price tag, a no closing cost loan would be perfect for you. You can refinance your home while paying no closing costs, yet reducing your interest rate with a predictable monthly payment, pulling cash-out, or both!
The benefits of a no cost refinance are outlined above, but there is a tradeoff. The key is determining your cost/benefit. In most cases, the benefit of a no cost loan outweighs the cost associated with paying closing costs.
No closing cost loans carry a slightly higher interest rate than loans with costs and loans with discount points. If you keep your mortgage for the life of the loan, then paying costs and discount points could make sense. Your benefit to paying costs is reaped in the long term. The less time that you keep your loan, the less the benefit there is to paying costs.
One of the big factors in determining whether paying costs is worthwhile is calculating your break even point. When will you recoup the costs that you pay upfront? Break even points can often be 5-9 years or even beyond. A good loan officer should be able to walk you through the options and tailor your mortgage to fit your long-term goals.
So, should you or shouldn’t you get a no closing cost refinance? Here are the pros and cons of no cost refinance offers.
It can be easier to manage your home refinance if you don’t have to come up with thousands out of pocket for closing costs. Instead of having all of your assets tied up in your home, you can maintain a healthy savings account that can be used for home repairs or emergencies, or paying monthly mortgage payments in case of a job loss, accident, or another setback. This can help keep you more financially stable.
For those that are unsure if they’ll keep the mortgage for a very long time, it hedges the risk of paying a high cost only to refinance or move before you break even. Lastly, do you have better uses for your money than having it tied up in your mortgage?
If you don’t pay your closing costs upfront, you are basically increasing the interest rate on your loan. This can mean that you pay more interest on a monthly basis and over the life of the loan.
Those that are unsure of how long you’ll keep the home or mortgage or those lucky few that know they won’t keep the home or mortgage long term, yet still want to benefit from a lower rate, different term or pulling cash-out.
On the other hand, if you know that you’ll keep your home and mortgage for the long-term, the investment of paying closing costs may be worth it. Those that can afford the costs upfront, but need the payment that comes with the lower rate compared to the slightly higher rate options with less cost.
We have a $0 lender fees and $0 commission policy. At Sammamish Mortgage, our Loan Officers are not paid commissions. We strongly believe in allowing our Loan Officers to be advisors and educators, versus just salespeople.
By removing commissions and compensating our Loan Officers with salaries, we’ve effectively removed the pressure to close and allowed our Loan Officers to do what they do best: be your advocate!
Sammamish Mortgage has been in business since 1992, and has assisted 1,000’s of homebuyers in the Pacific Northwest. If you are looking for mortgage programs in Washington State, Oregon, Idaho or Colorado let Sammamish Mortgage help you get pre-approved.
Contact a loan officer if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.