What is a No-Cost Refinance?

There are a variety of mortgages and refinance programs offered to consumers each day. From fixed-rate loans, ARMs or flexible-payment loans, you could find that not all mortgage loans have the same benefits. Today, consumers can explore the options offered by each of these loan programs, whether they’re thinking of buying a new home or refinancing their existing mortgages. One popular form of mortgage loan refinancing is the “no-cost refinance.”

Depending on your lender, a no-cost refinance can go by several different names. Some banks and lenders call them no-fee refinances or no-cost mortgages. In general, these are all similar programs: They mean that the loan will be processed with reduced or minimal closing costs when compared to “traditional” mortgage loans.

The benefits

No-cost refinances are popular because they eliminate so many of the frustrating costs associated with mortgages. Anyone who’s taken out a loan knows about the title fees, courier fees, and various certification and recording fees – and of course, points. These fees can add up to thousands and thousands of dollars, making the cost of your mortgage quite expensive. With a no-cost mortgage, some or all of these fees will be eliminated by your lender – you should check to find out exactly which fees are eliminated, as they can vary by lender.

Some costs

Remember that not all fees will be eliminated by a no-cost refinance. Unfortunately, there are just some costs that can’t be avoided. This is true for traditional refinances and specialized programs such as no-cost mortgages. As you plan out your finances, keep in mind that you will likely still be responsible for escrowed fees such as your property taxes or even mortgage insurance. Also remember that you will be responsible for prepaid interest – if you take out the loan on the 15th of the month, you’ll need to cover the interest between that day and the day your first mortgage payment is due. To understand all of these costs, be sure to ask for a Good Faith Estimate and carefully review each of the costs and credits. Compare these to the actual refinance documents when you’re presented with them.

Consumer tips

Of course, there are some drawbacks to no-cost refinances. Depending on your personal financial situation, the type of refinance you want and your ultimate goals, you may find that the no-cost refinance might not be the best solution for you. Remember that every loan is different, just like every consumer is different. Be sure to think of these factors so you can evaluate whether a no-cost refinance is best for you:

• Nothing is free: While a no-cost refinances has obvious benefits, remember that there can be drawbacks. Somehow, the bank will be profiting from your loan. This could come in the form of a higher interest rate for your loan. This means that instead of paying thousands up front or tacked on to the principal balance of your loan, you instead will pay for it over time with each monthly mortgage payment.

• Will you benefit? If you are planning on paying off your home quickly, or only living there for a short amount of time, the no-cost refinance could be a benefit. Think about it: If you paid $5,000 up front for a mortgage for a house that you sold after a year, that’d be expensive. But if you only had a minute amount of interest each month, and then sold after a year, it could be very worthwhile.

• Tax benefit: Remember that if you pay more out-of-pocket in interest, you theoretically could have a higher tax benefit. It might be worth making a comparison chart of costs and benefits for a traditional refinance vs. a no-cost refinance.