Are you planning to refinance your mortgage? Hold on a second, and listen to what the best real estate agent says about no closing cost refinancing.
Yes, it is possible to refinance your mortgage without shedding any upfront cost on the closing day. However, you should know more about such an option to prepare for its drawbacks, which would help you make the most out of it.
Now, what should you know about no closing cost refinancing? Why should you grab such an option, and what are its drawbacks? Read on to understand this choice today.
What the Best Real Estate Agent Tells about No Closing Cost Refinancing
First off, what is mortgage refinancing? In a nutshell, refinancing refers to swapping your old mortgage with a new loan. A lender would pay your old mortgage; then, you must pay such a new loan. That’s why it is called mortgage refinancing.
Now, why should you refinance your mortgage if it is just trading your old loan with a new one? That’s because of the benefits that it brings.
1. Pull Down Interest Rates
Interest rates change over time. Thus it is not surprising if the interest rates of your mortgage become significantly higher than current market offers. The thing is, if you’d refinance your mortgage, you can enjoy the current lower interest rates in a snap.
How? Because having a new mortgage means agreeing on a different set of factors. That includes having new interest rates as well.
Although, the best real estate agent reminds you to only refinance at the right moment when you want to enjoy lower interest rates. The current average rate in the market must be far lower than that of your old loan.
2. Decrease Monthly Payment
Mortgage refinancing can pull down your monthly payment as well. There are two essential factors to think about with this point.
- The new loan would cover only a fraction of the old mortgage that you haven’t paid yet. Meaning it is much smaller than the old one. Thus you’d get a lower monthly payment after spreading the principal to the life of the loan.
- Next, it is possible to move the payoff deadline to a far later date. Meaning you’d get more time to pay a smaller mortgage. Thus you’d get an even smaller monthly payment.
3. Switch to a Different Mortgage Type
Refinancing an old mortgage also lets you switch to a different loan type. Note that mortgage loans have two primary categories according to interest rates: fixed and adjustable mortgage rates.
The former has interest rates that stay constant throughout the life of the loan, while the latter has rates that can rise and drop. Homeowners switch from adjustable rates to fixed rates to save themselves from big interest rate increases.
4. Borrow Extra Cash
Say you need extra cash for purposes other than home upkeeps or improvements. Mortgage refinancing can help as well; specifically, the cash-out refinance option. Although, the best real estate agent would remind you that such a move can affect your home equity.
Cash-out refinance is about borrowing against your home equity, and you can use the cash for any purpose. Cash-out refinancing is an excellent option for having extra cash since mortgage loans have lesser interest rates and monthly payments than traditional loans.
5. Get Rid of Private Mortgage Insurance (PMI)
Many mortgage lenders require borrowers to pay for PMI upon closing. You can only stop paying such a fee once you finish paying 20% of the property’s sale price. That’s when you should think of refinancing the mortgage to completely put the PMI out of the equation.
Essential Points to Learn about No Closing Cost Refinancing
Above are the biggest reasons why homeowners want to refinance their mortgage. Of course, you could have other reasons in mind as well. However, whatever your reasons are, you would want to make the most out of your new mortgage by skipping the closing costs.
Yes, closing costs are necessary to pay when you first buy a house. When you refinance a mortgage, it is possible to skip the closing costs temporarily.
How? The lender would throw the cost right into your interest rate or principal amount. Meaning you’d pay it as you pay the mortgage loan.
However, the drawback is obvious: you need to pay higher interest rates or monthly payments. That is why the best real estate agent reminds you to only grab such an option when it applies to your situation.
When to Choose No Closing Cost Refinance
No closing cost mortgage refinancing is best if you only plan to stay in your home for a few years. That is because the lump sum of the added interest rates or principal amount can become significantly larger than what you could have paid upfront.
However, remember that it is still a sort of case-to-case basis situation. Some other factors can also play into consideration aside from the length of your stay in the property.
For example, refinancing your mortgage helps you get rid of the PMI. Now, if you’d end up calculating a smaller amount than what you would with the insurance, then you’re probably heading to a good choice.
Meaning, to help you decide, make sure that you’d have lesser expenses while paying for a new loan. The amount you’re skipping on closing should be larger than the added value on your new mortgage too.
That’s why you should carefully calculate the cost and make sure that the results favor you. You can talk with the best Realtor for some help or use a reliable online mortgage calculator. Carry the value offers from your lenders, such as interest rates and loan amount.
Understand Lender Credits
Your lender would probably offer you to get some lender credits when you opt for no closing cost refinance. What are lender credits? These are points that let you fuse the closing costs to the interest rates.
Meaning your interest rates would become higher to cover the closing costs. Moreover, note that the number of lender credits tells the amount of increase on the loan interest. Thus the best real estate agent reminds you to get enough lender credits.
Interest Rate Increase vs. Loan Amount Increase
When refinancing your mortgage without closing costs, you need to choose between pumping up the interest rate or loan amount. Consider these points carefully to make a choice that suits you:
Interest Rate Increase
Choosing to have a higher interest than paying closing costs can make you pay more to the lender.
Say you want to borrow $200,000, and you need to pay it in 15 years. If your interest is 3.5%, then its lump sum in 15 years is about $57,400.
Now, say you need to pay 6% or $12,000 for closing costs, but you instead choose to shoulder a 4% interest. That means you need to pay an accumulated interest of $66,220. The difference of $8,820 is somewhat reasonable for you to cover.
Loan Amount Increase
Choosing to pump up your loan amount results in a higher accumulated amount through the years as well.
For example, you’re borrowing $200,000 and an additional $9,000 for closing costs. Then you need to pay it in 15 years with 3.5% interest.
The $200,000 initial amount would make you pay $1,430 each month, and the $209,000 would demand $1,494 monthly. The difference totals $11,520 in 15 years. That is $2,520 higher than the upfront closing fees.
What the Closing Costs Include
Now, the best real estate agent shows you the list of common fees to pay during closing. Knowing these points helps you understand which among the two options are worth paying for your situation.
- Application Fees – You need to pay such fees when applying for a mortgage. And that applies to regular loans or refinancing mortgages.
- Lender Charges – The lender needs to decide whether they’d approve your loan application or not. Such fee includes the underwriter charge for evaluating your application and the origination fees for preparing your loan agreement.
- Title Insurance Fees – You need to pay such a fee for ensuring that your property title has no errors or other disputes. Yes, you’ve paid title insurance upon initially buying your home, but you need to pay it again when refinancing.
- Appraisal Fee – You need to hire an appraiser to know the current value of your home. The lender wouldn’t want a home that has significantly dropped in value.
- Escrow Fees – You also need to pay for escrow because such an account is essential for handling payment matters.
- Credit Report Charges – This fee is about the lender digging through your credit history. They want to make sure that you’re credit scores are still on a good level.
Keep this Guide for No Closing Cost Refinancing
No closing cost refinancing is an excellent deal for many homeowners today. Of course, you’d love it when you want to swap your old mortgage for a new one too. However, be sure to keep the points above to guide you through such a step. Also, talk with the best real estate agent for further help.