The Good and Bad of No Closing Cost Refinance

A no closing cost refinance option, or 0% closing cost, has been around since the early nineties. It was popular during the real estate boom as people that were short on cash could still afford a home and lenders were happy with these loans as they could recoup the costs on interest payments. However, due to poor lending practices of the past and the watchful eye of lending practices, it is of utmost importance as the borrower to arm themselves with enough knowledge to understand what a non closing cost refinance is all about.

A no closing cost refinance might sound like a good option, but first consider all your option as this might not be the most cost effective way to refinance your home mortgage loan. When refinancing mortgages, you will usually have the option of having the lender pay for some of the closing costs. Closing costs that can be paid by the lender are usually the non-recurring costs such as some points and fees. Of course, nothing is for free and if you do choose to refinance with no closing costs, the lenders will reoccur costs in other ways. One of those ways that lenders recoup their costs is by charging a higher interest rate. Usually one can expect to pay about point .20 percent to .55 percent higher than a regular no-points mortgage refinance. What kind of non-recurring closing costs are paid by the lender? Do you even know what non-recurring closing costs are? Non-recurring costs mean that there is a one-time payment for closing fees such as, appraisal fees, your credit report, title insurance, escrow fees, recording fees, notary fees; recording fees, title fees, and lender closing cost fees are not paid by the borrower with a no closing cost refinance.

Basically all fees that are tied towards the purchase of the house and do not affect the loan, can be related towards non-recurring closing costs. Fees that will still have to be paid by the borrower are taxes, interest and home owners insurance. So why should you choose a no closing cost refinance? Sometimes people just do not have the cash to pay all of the fees to close out a refinance deal. If you are in this situation, then maybe a no closing cost scenario is best for you. However, if you do have the money for closing costs, then try to determine whether one option (lower interest rate refinance with closing cost vs. no closing cost mortgage refinance with a slightly higher interest rate). Also, if you do have the money to pay the closing cost and fees, determine whether the costs are included within your refinance package or if you’ll have to pay the costs out of pocket. If paid out of pocket, then you will have to pay in cash through check or escrow.

Again, if you do not have the money for the closing costs on your refinance, then you could also take the higher interest loan and have the lender pay your non-recurring cost costs. Also, another consideration is to take in how long you are planning on owning the property that you are investing in. Basically, the longer you have the property, the longer the time you have to recoup the closing costs. If you are planning on holding the property for a long time, then perhaps going the lower interest rate with closing cost refinance is a better option. Lastly, if you are performing a bad credit refinance and your credit situation is better, then you probably should do a no closing cost refinance as you will get the benefits of decreasing your interest rate without having to pay closing costs.