No Closing Cost Refi? Yes, They’re Still Around

An alternative way of refinancing your home.

If you’re considering taking on a home improvement project, one way you can fund the work is to refinance your current mortgage. Essentially, the way that this option works is that you have enough equity built up in your home so that you can pay off your mortgage and cover the cost of the work that needs to be done. Importantly, you may be able to get a loan that involves no closing costs, specifically a no closing cost refi or refinance.

Mortgage History

The no closing cost refi was a popular financing vehicle when home prices were skyrocketing as late as 2007. Then, homeowners were refinancing frequently, obtaining new loans and sometimes through the same lender. By keeping the same lender, they increased the odds that the closing costs would be absorbed by the mortgagor, who was eager to keep his portfolio brimming with new customers.

After the stock crash of 2008 and subsequent mortgage meltdown, the types of mortgages available were limited, with some going completely to the wayside due to excessive risk and foolish lending practices.

With a no closing cost refi, you find a loan that incurs none of the costs you’d typically be faced with including title search, stamping fees, mortgage application and more. Sounds great, right? Well, there is a catch…

Comparing Mortgages

And that catch is this: you’ll be charged a slightly higher interest rate to cover your loan. That’s right, while the going rate for your 15-year fixed rate mortgage might be 4.5 percent, you may be charged 4.75 percent. That doesn’t sound bad, but consider this: if you borrow $200,000 for 15 years your monthly cost will be $1,530 at the lower rate. At 4.75 percent, your monthly cost rises to $1,556.

At a difference of $26 per month, you aren’t concerned. However, spread that out over 15 years or 180 months and you’ll pay an additional $4,650. That amount is probably slightly higher than what you’d pay in closing costs with a traditional home loan.

Your Choice

As you can see, the no closing refi loan does cost you. It just won’t cost you at closing. Instead, your closing costs are spread out over 180 months, allowing you to hold onto your cash now, but give it up gradually as the months and years pass by. Certainly, you’re paying as you go, which is the “truth” behind these widely touted and still popular “no closing cost” refi loans.

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