Refinancing a mortgage is not a cheap proposition–there are title and escrow charges, appraisal expenses, recording fees, transfer taxes, and lender charges. If the idea of writing a check for all of that makes you a little queasy, a no cash or no cost refinance probably sounds very good.
No Cost Isn’t the Same as Free
Refinancing a mortgage usually costs more than buying a home, because in most areas the seller covers some of the costs of getting a mortgage. But when you refinance your home, they’re all yours. Ugh.
Enter the No-Cost Mortgage Refinance
It is what it says–you won’t need to write a big check for a bunch of charges when you close on your home loan. But do you really expect the lender, title company, appraiser, and everyone else to work for nothing? That will never happen. So, to make a no-cost loan a no-cost loan, your lender has to get money from somewhere. And it does–from you–every month. Because a no-cost mortgage refinance comes with a higher interest rate, so you write a slightly bigger check each month instead of a humongous one when you close on your loan.
When No Cost Is a No Brainer
That’s okay if you don’t know how long you will keep your property, or you know you’ll unload it in a year or two. If you can get a better interest rate than you have now, and don’t have to pay a thing for it, that’s all good. It’s free money. But if you plan to keep the property and the new mortgage for some time, you need to do a little more work. Use a refinance mortgage calculator and see how long it would take to recoup your upfront refinancing costs with the monthly savings. You may find that in the long run it pays to, well, pay.
Enter the No-Cash Mortgage Refinance
So, you have determined that it makes sense to pay some fees and get a lower rate, but, um, you don’t have the cash. Are you stuck? Not necessarily, because you can pay the fees and have them added to the balance of the new mortgage. Again, use a mortgage calculator to make sure that you can break even in a reasonable time. And make sure that you have enough equity to do this without being clonked for extra mortgage insurance.
So, whatever way you choose to pay your mortgage refinance fees depends on how much cash you feel comfortable parting with, what your time frame is, and how much home equity you have. It’s always a trade-off: the best mortgage interest rates cost more, the higher rates costs less–and there is no free lunch.