Refinancing costs money whether you like it or not. Just like you paid closing costs when you bought your home, you’ll pay them again when you refinance.
Some lenders offer what they call a no closing cost loan. You probably wonder how that is a thing. How could a lender give you a loan without charging closing costs? It’s simple – they charge you a higher interest rate. Most lenders charge around a 0.5% higher rate, but it will vary by lender.
So when does it make sense to request this type of loan?
Homeowners That Will Move Soon
If you want to refinance to get a lower payment, but know that this home is only temporary, it may make sense to forgo the closing costs. If you can secure a loan that has a lower payment than your current payment even without paying closing costs, go for it!
This allows you to save money on your monthly expenses but avoid the closing costs. Let’s say your closing costs would have been $5,000. If you saved say $100 per month with the new payment, it would take you 50 months to pay off the closing costs. If you only plan to be in the home for another two years, though, you’d lose money on the deal. If the lender paid the closing costs for you, though, you won’t lose out – instead, you’ll gain the savings that the new payment offers.
Homeowners That Will Refinance Again
If you already know that you will refinance again in the future, why pay closing costs now? If you aren’t going to keep the loan, it doesn’t make sense to do so. Typically, you pay the closing costs out of pocket so that you can secure that lower interest rate. If you won’t keep the loan for very long, though, it doesn’t make sense to pay the costs to get that lower rate.
Maybe you need to lower your mortgage payment to get some extra cash in hand. Or maybe you want to refinance to take cash out to improve your home. You know you will take a hit on the interest rate for having a cash-out refinance, so why not take the hit for no closing costs too? Once you fix up your home and the value increases, you’ll have more equity in the home, which should allow you to secure a low interest rate when it’s all done. Paying closing costs at that point may make sense, but paying closing costs on the cash-out refinance probably doesn’t.
Homeowners That Can’t Afford the Closing Costs
Of course, there are those that just can’t afford the closing costs. It’s understandable as they are costly! You can pay as much as 5% of the loan amount in closing costs. Do you have that kind of money lying around?
If you don’t, you can bargain with the lender. You don’t have to take the first interest rate they quote you in exchange for no closing costs. Go ahead and negotiate the rate. Chances are that a lender will want to win your business rather than lose it to someone else over an 1/8th of a point or even ½ of a point. This way you can get a ‘lower’ interest rate and avoid the need to pay closing costs.
Refinancing your home without paying closing costs seems like the perfect solution. Just make sure you understand how it affects your bottom line. If you will keep the loan for the long-term, we recommend paying the closing costs so that you can keep your interest rate down. Remember, the interest rate is something you will have until you pay the loan off in full. If you are talking about the next 30 years, even 0.5% in interest can really add up.