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What Is a No-Cost Refinance?


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TERMINOLOGY

A no cost refinance is a popular mortgage choice since it does not require any cash to be paid at closing. However, there are fees that are involved in a refinance that cannot be avoided such as taxes and title fees. These fees will be paid, by you, in some form. There are two main ways that a borrower will pay closing costs in a no-cost refinance.

Higher Interest Rate

One way that the bank can roll your fees into your loan is by increasing your interest rate. You may qualify for 5 percent, but the bank will give you half a point higher than that. Over time, you will have paid back the costs and then some. The one instance where this is a good deal is if you plan on selling the home shortly after the refinance. If you will be selling in a year or two, you will likely pay less with the higher rate than if you paid the closing costs in a lump sum.

Rolled into Loan

The other way that a no cost refinance charges you closing fees is in a lump sum rolled into the mortgage. This will increase your mortgage balance, and if you stay in the home for a long time, you will pay much more than the actual costs, since you will be charged interest for thirty years on those closing fees.