Home Refinancing News
Wednesday, April 23rd, 2008 Subscribe To Our Feed
What about no-cost refinance loans?
There are a ton of ads out there pimping them.
They sound good but they may not be good for you.
Read the fine print.
Add up all the costs.
Usually these no-cost loans will have a higher interest rate.
Your new home and mortgage? What will you do with it? You want to trade it in for a newer model? Do you refinance every few years? You want to pay upfront?
If your answer is you plan to stay in the home for five or more years, it seems to make more sense to pay the fees upfront for future savings. That $245 savings each month might ease your budgeting woes in the future and amount to some serious savings if you stick with the mortgage for the long term.
The Newark Advocate writes:
You might have seen ads lately for a “no-cost refinance” mortgage loan. This appears to be a mortgage program that promises no fees or out-of-pocket expenses when you refinance your existing home mortgage. As a mortgage lender, I’m always suspicious when someone offers a mortgage loan for nothing.
You should know while this type of mortgage offer is not a new concept to lending, it’s definitely a subject worth discussing to ensure people understand what they’re getting when they choose a no-cost refinance option.
A no-cost refinance is a loan transaction without any upfront fees, including the typical costs such as an appraisal fee, title/escrow fees, loan origination points, lender’s fees and so on. This is OK in theory, but how does the lender make up for the absence of fees that are associated with a mortgage loan and normally must be paid?
The true reality of this type of “no-cost refinance” is these loans actually will bump up your interest rate, sometimes dramatically make up for the missing fees that usually are charged at closing.
Here is a short example to help you understand how the program works:
You are a borrower, and your credit profile allows you to qualify for a mortgage at an interest rate of 6 percent on a $500,000 loan, paying one point to the lender and an additional $2,500 in closing costs for a total of $7,500. While these costs might seem like a large investment upfront, your trade-off is a lower interest rate.
With the no-cost refinances programs I’ve reviewed, you’ll complete the mortgage transaction without paying a penny, but you might end up with an interest rate of 6.75 percent or even higher on the same $500,000 transaction. If we go further, your monthly payment at 6 percent is $2,998, compared to your monthly payment of $3,243 at 6.75 percent. So you’ll end up paying an additional $245 a month or $2,940 annually if you’ve selected the no-cost refinance at an interest rate of just 6.75 percent. You quickly can do the math: $2,940 per year and three years into the mortgage, and you’ve spent $8,820.
This is the point where you should ask yourself what your plans for the future are.
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