No Closing Cost Refinance For You

By Jessica Fervent

When you’re thinking of refinancing your home mortgage, one of the biggest uncertainties you have to face is to determine if refinancing to a lower rate is worth the refinancing cost that you have to pay to the lender. You run the numbers at mortgage refinance calculators over and over again to help you decide. However, there is an option, a no closing cost refinance, for homeowners to think about. With this type of plan, you don’t have to pay the up-front refinancing cost because the lender will assume this cost and it will not be added to your loan balance.

The downside to a no closing cost refinance option is that your refinance rate is higher than the rate you’ll get if you’re the one to assume the refinance cost. Your refinance rate is usually higher by 0.25% or higher, which basically means that you’ll still be paying the cost but this time instead of paying it up-front, you’ll be paying it over a period of time, due to the higher refinance rate. When you’re thinking of such refinance, you have to consider this increase in refinance rate, even though you may think that a slight increase in refinance rate means nothing compared to paying thousands of dollars for this type of cost.

To fully understand if a no closing cost refinance is ideal for you, let’s run the numbers. If you have a $300,000 refinance loan, your monthly payment will be $1,847.15 at a 6.25% refinance rate. If you will be the one paying $2,800 instead of the lender, your rate will be at 6% only. You will be paying $1,798.65 a month in this deal. If you choose to go for this type of refinance, you would have saved $48 a month. If you divide the cost by this monthly savings, you will see that it will take you 4.81 years to break even.

If you were wondering what a breakeven point is, this is the number of years that you would have recouped the amount you paid for the closing cost. To determine if such refinance is the right option for you, you should also determine if how long are you planning to hold on to your mortgage. This is where the breakeven point comes in. If you’re planning to leave your home or to let go of the mortgage in 5 years or less, this refinance is a good idea. However, if you have plans of staying in more than 5 years, it is best if you’ll pay for the closing cost yourself.

There are no closing cost refinance deals and there are no-cash refinance deals. Do not confuse yourself with these two because they are definitely not the same. With no closing cost refinance, your lender will be the one paying for the cost, while in no-cash refinance, it will be added to your outstanding balance and you’ll be paying for it plus interest. Before signing up for any refinancing deals, you should understand all the minute details and ask your lender everything you want to know. There are refinancing calculators that can help guide you in this decision and you should utilize these free online tools from refinancing websites.

Will a no closing cost refinance help you financially? Is it the best type of refinance you can get? Find out more here.