After you have carried a mortgage for some time, you realize that you can strike a better deal. The only way to change the initial loan terms and conditions to more favorable ones is to refinance a mortgage. Yet, you still hesitate since replacing your current loan with a new one obviously comes at a cost. Or not so obviously? Can you refinance your mortgage for free?
Read on if you want to learn if this is doable.
Dissecting Mortgage Refinancing Costs
When a borrower refinances their mortgage, they don’t make a down payment (as they did when getting a loan), but they have to cover several types of closing costs.
- Refinancing application fee. To start processing your application, the lender charges a fee of up to $500.
- Underwriting fee. You pay the lender 0.5%-1.5% of the loan amount to cover new loan preparation and evaluation costs.
- Appraisal fee. Verifying your home's current market value will cost between $300 and $600.
- Title services. The lender charges from $300 to $2,000 to perform a title search and issue a new title insurance policy (necessary to protect the mortgagee from past property ownership lawsuits).
- Credit report fee. $30 more will go to enable the lender to obtain the borrower’s updated credit score from a consumer reporting agency.
- Recording fee. This one (anything between $20 and $250) is charged by your local authorities to officially register the new mortgage.
- Property tax. If you close your mortgage refinance just before your annual or semiannual tax payment is due, the lender will collect that money as well.
- Attorney's fee. This is relevant if a real estate lawyer comes into play.
All told, the refinancing costs may reach several thousand dollars. A sore blow to any budget, is it? Well, you can cushion the blow by opting for a no-cost mortgage refinancing.
How Mortgage Refinancing Can Be No-Cost?
The honest answer: it can’t. You will still have to cover those expenses. What about cushioning the blow, you may ask? This is the whole point of what is called “no-cost refinancing”. By choosing this option, the borrower doesn’t pay the lump sum upfront but spreads these costs more evenly across future expenses.
Thus, no-cost mortgage refinancing comes in two guises.
- Rebate pricing. The lender extends a credit (hence it's sometimes called a lender credit) to pay the borrower’s closing costs. In exchange, the mortgage rate becomes somewhat higher. As a result, you pay more interest as long as the loan lasts, but the principal balance remains the same.
- Including the closing costs in the loan. The mortgage refinancing costs are added directly to the loan’s principal balance. So your monthly payments will grow not because of a higher rate, but because you are borrowing a larger sum. The outcome is that you accrue interest on the closing costs down the line.
Which scheme is better? All things considered, a lender credit is a more attractive option. It allows customers to keep the principal balance unchanged and minimizes long-term interest expenditures, as you don't have to pay compound interest on the rolled-in costs. So if you plan to live in the house or apartment for a long time or pay off the loan lickety-split, it is your natural choice. On the flipside, rolling the closing costs into the loan makes sense if you plan to sell the property within 5 years or less, or if you want to maintain the interest rate at the absolute lowest, since you can't afford even a slight rise.
As you can see, no-cost mortgage refinancing isn’t free, after all. What are the pros and cons of this scheme in comparison to the regular refinancing practice?
No-Cost Mortgage Refinancing: Zooming in on the Pluses and Minuses
Let’s start with the upsides.
- Absence of upfront expenses. You don't need cash on hand to cover refinancing costs, which increases the accessibility of the process.
- Saving money for other purposes. Buying a house or apartment is only the first expenditure item. As a rule, new owners need money for home improvements, furniture purchases, and other investments, so keeping your cash for emergencies and overhead is a wise policy.
- Short-term cost-efficiency. Accepting a higher interest rate makes perfect sense if you plan to move out or think of refinancing again in a couple of years.
There are downsides to getting a no-cost mortgage refinance, too.
- The closing costs are still there. You pay the sum indirectly through a higher rate or a larger loan amount.
- Greater long-term expenditures. You will pay more in the long run than if you fork out the lump sum right away.
- Possibility of triggering mortgage insurance. If you choose to roll the refinance costs into the new loan, your loan-to-value (LTV) ratio will change. As a result, lower home equity will make mortgage insurance mandatory. And it spells more expenses.
Although no-cost mortgage refinancing is pretty straightforward, greenhorns in the field often seek the help of competent mortgage experts.
How LBC Mortgage Can Help You
What do you expect from a mortgage broker you turn to for professional advice? Of course, obliging and experienced personnel who know their domain inside out and whose top-notch expertise enables them to provide qualified recommendations. The employees who work at LBC Mortgage tick all these boxes. They can consult you on the niceties of no-cost mortgage refinancing as well as any other questions regarding the homebuying process.
Contact us for a professional consultation and discover the financial products we offer.
Drawing a Bottomline
When you refinance a mortgage, you have to open your wallet wide to pay a number of fees (including refinancing application, underwriting, appraisal, recording, title service, and more) to the lender and local government. If you don’t have the necessary sum or want to save cash for emergency expenses, you can use the no-cost refinancing option. According to this scheme, the lender pays it for you now, and you will have to reimburse it later by either accepting a slightly higher mortgage rate or rolling the closing costs into the loan.
Experienced real estate specialists and consultants will help you decide whether no-cost mortgage refinancing suits your situation and assist in choosing the right approach for your unique use case.
