Mortgage refinance loans require fees and closing costs. Is there a way around those fees? Is it possible to refinance without paying closing costs? The answer is yes, although the rest of your loan will be affected.
The typical fees associated with refinance loans include mortgage lender fees and third-party fees. Lenders fees consist of things like origination (Advanced Funding does not charge this fee), processing, and underwriting. Some no-cost refinance programs have the lender pay for all these fees but still require the borrower to pay for third-party costs. Those are made up of things like appraisals and title and escrow fees. There are also refinance programs that allow all fees to be rolled into the cost of the loan rather than paid upfront.
In either case, a “no-cost” refinance loan is not truly cost-free. Either the lender will charge you a higher interest rate on the loan or the closing costs will be added to the balance of the loan, both of which can increase your monthly payments.
Even though you end up paying for the closing costs in some form, not having to provide upfront cash can be very helpful in some situations. If you are refinancing to pull cash out of your equity for some project or debt, you probably do not want to or cannot cough up several thousand dollars for closing costs. Paying a little more each month for them is more appealing if you can get the much-needed cash from your equity now.
A no-cost refinance may also be smart if you do not plan to stay in your home for the long-term. Since these loans roll the closing costs into the loan total or charge higher interest rates, you will not be around long enough to finish paying for them. You will have saved yourself plenty of money out-of-pocket that could be used on closing costs on your next home.
The name of a “no-cost” loan is deceptive because while you do not pay cash up front, you will still pay for the closing costs over the course of the loan. If you are trying to capitalize on lower market interest rates, you will not be able to get the best rates available if you try to forgo the closing costs. Your rate savings will be offset by higher rates and monthly payments.
Negotiate and Understand the Terms
If you decide a no-cost refinance is right for your needs, don’t be afraid to negotiate with your lender. There may be some wiggle room to make the total cost of the loan more amenable. And of course, it is important to understand the exact terms of your no-cost loan. What fees are covered? Are you expected to pay anything out-of-pocket? What will your final interest rate be? These are all essential questions to ask before getting locked in.
No-cost refinance programs can be the right decision for you depending on your situation. Your mortgage broker can help you determine which options are available and helpful to you.