The Truth about a No Cost Refinance

by Adam on July 19, 2011

In the mortgage world nothing comes for free. So, when someone asks you if you’re interested in a “no cost refinance”, what do you think they mean?

They are talking about a “no cost refinance” in which you do not have to pay closing costs upfront. Thus the term “no cost”. This, however, does not mean you will not have to pay for those closing fees. It only means that you will pay for them in the long term. In most cases a no cost refinance will end up costing you more for your home over the life of your mortgage.

The primary advantage of a no cost refinance is that you do not have to pay the closing fees when sign for your new loan. By understanding how a no cost refinance works, you will be able to make the right choice about whether a no cost refinance is something that you want to look at further or avoid all together.

No Cost Refinance Types

A conventional no cost refinance takes the closing fees usually associated with the upfront payment and rolls them into the loan. This can occur in one of two ways:

  1. The closing costs are added to the interest to make it a no cost refinance
  2. The closing costs are added to the principle to create a no cost refinance.


(Note: A lender may choose to pay for these fees as well, but this is typically only done in very select situations where there are other factors involved.)

Either way, the result is the same. You will continue to pay for those closing costs throughout the life of your loan. This means that you could end up with a higher monthly payment after you’ve taken a no cost refinance, even if your interest rate goes down.

So, Who Wins in a No Cost Refinance?

The answer to this question depends more on what you are looking to get out of the no cost refinance. The fact is that interest rates are still quite low and housing prices have continued to remain stable. This could mean that you now qualify for a refinance that you didn’t earlier in the year. Unfortunately you may not be able to afford the costs associated with this refinance. This is when you will want to look at a no cost refinance as a way to get the refinance you want, without breaking the bank. The trick is doing some maths to find out if the refinance will actually save you money.

The No Cost Refinance Maths

It is impossible to tell you whether a no cost refinance will save you money every time. The assessment of a no cost refinance must be done individually. This makes it a lot harder for the average consumer to tell whether they are getting into a no cost refinance deal or a no cost refinance scam.

Basically, you want to have a look at the difference in the interest rate, loan length, and overall amount of the no cost refinance. If either of these are significantly higher than they were before the no cost refinance you may be in trouble. In all cases where you are unclear of the possible savings a refinance could provide, consult a professional.

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