If you’re considering a no cost refinance for your next home loan there are several things you need to know to avoid one of the most common mortgage mistakes that will cost you thousands of dollars. Many brokers will try to sell you on a no cost refinance as a sure path to mortgage refinancing bliss; however, if you look at what the no cost refinance option does to your payment you might be surprised at how much extra you’re paying. Here are several of my best refinancing tips to help you avoid common mortgage mistakes that cost you thousands of dollars in unnecessary markup and junk fees.
The No Cost Refinance Craze
What could be better than having the lender pay your closing costs and loan origination fee on your next mortgage refi? For many homeowners closing costs are in excess of $3,000 and are often laced with junk fees that you’ll have to recoup before realizing any benefit from your new home loan. This is the perfect argument for a no cost refinance; let the lender pay all the junk fees you’d otherwise be haggling with your broker to avoid paying,
The problem with this no cost refinance option is what you’re giving up to have the lender a little over $3,000 in fees. Mortgage rates are at historically low levels and with almost zero effort you can secure the best refinance rates of the year…unless you’re opting for this no cost refinance option.
Higher Interest Rates Means Higher Payments
Here’s an example to illustrate how the no cost refinance works and the problems you’ll likely encounter by accepting a higher interest rate. Suppose for example you’re refinancing your home for $255,000 and you qualify for the best refinance rates of 5.0%. If you accept this interest rate you’ll have to pay the loan origination fee and other closing costs yourself. Mortgage origination fees will reasonably set you back one percent of your home loan amount although many brokers will try to charge you more than this. (Origination fees are negotiable so don’t be afraid to haggle)
In this example one percent of $255,000 is $2,550, which you’ll have to come up with to close your mortgage refi. If you take the no cost refinance option and let the lender pay this fee for you you’ll be accepting a higher interest rate of 5.5%. What does this extra .5% do to your monthly payment amount?
On a fixed-rate, 30 year home loan for $255,000 at 5.5% your monthly payment will be $1,450. If you had the interest rate you deserve at 5.0% your payment would only be $1,385 per month. That’s a difference of $780 per year that you’re paying extra just to cover your closing costs. In five short years you’ll have paid $3,900 for the no cost refinance, which balloons to $7,800 in ten years. This isn’t a car loan we’re talking about here; this is your home, which for many people is the most important purchase of their lives. Why would you take shortcuts to save a few bucks in mortgage origination fees and closing costs for something this important?
You can learn more about avoiding lender junk fees and unnecessary markup of your mortgage refi by checking out my free Underground Mortgage Refinancing Videos.
Here’s a short sample to get you started down the path to personal financial bliss.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
This is a good article and I agree that many people take the “no cost” refinance just because it is the “flavor of the month” or they don’t understand the math and how much more they will pay over the long run.
I would add that there are times when the “no-cost” refinance does make sense. For example it doesn’t make much sense to pay closing costs if you are going to sell the home in a couple of years but can still save some money in the short term by lowering your interest rate.
Also, in a climate of dropping interest rates it can make sense to do a “no cost” refinance. This way, if rates fall some more you can refinance again and won’t feel stupid for having paid a bunch of closing costs that would have been paid in vain.