You hear it all over the radio and see it all over the internet. “Refinance with No Cost”, which sounds a little…errr, maybe a lot too good to be true. Today we will talk about what is a no cost mortgage refinance, how does it work, and if it is right for you.
What is a no cost refinance?
A no cost refinance is when a lender rewrites your mortgage, and your new loan amount pretty much equals what your existing payoff is, less mandated up front mortgage insurance and or funds for your escrow setup. This means there are no lender charges for your loan.
How does it work?
Working of the universal concept of, “no one works for free”, there has to be a catch. Simply put,the catch is, the lender will increase your rate to be able to pay for your closing costs. Essentially, your closing costs getting paid for by a higher rate.
When is a no cost mortgage refinance right for me?
A no cost refinance is right for you when you don’t plan on being in your home much longer(3 years or less) but can have enough of an interest rate savings by obtaining a new mortgage.
For example, Mike in Chesterfield, MO is interested in refinancing his $125,000 mortgage. However, he is planning on moving in 3 years and is unsure if he should refinance.
| Now1 | Proposed2 | |
| Interest Rate | 5.250 | 3.750 |
| Balance | $125,000 | $125,000 |
| Payment | 750.29 | 746.12 |
| Balance in 3 years | 116,331 | 111,476 |
Using the above example, In 3.750% would be a higher than market rate(amazing) for a 20 year amortization, however a higher rate can be used to pay down borrower fees.
To conclude, a no cost mortgage refinance can work, but just like all things, you need to understand your situation and when it would fit for you.
- Original terms $135,500 5.250% fixed interest rate on a 30 year amortization in year 5.
- 125,000 at 3.750% fixed interest rate on 20 year amortization.