The Cost of “No-Cost” Refis
A growing number of cash-strapped Americans, looking to take advantage of record low interest rates, are now doing “no-cost” refis. What is this all about and should you go for it?
Here’s a quick FAQ:
What exactly IS a no-cost refi?
A “no-cost” refi is a mortgage program that promises you no fees or out-of-pocket expenses. All your upfront costs — from application, title search, credit check, appraisal, and other settlement fees — are paid for by the lender, and you “save” potentially thousands of dollars in the process.
Why am I hearing more about this product now?
While this product has been around forever, you’re hearing more about it now because so many consumers want to take advantage of historically low mortgage rates and do a refi, but can’t (or are reluctant to) come up with the closing costs. And rightly so: Closing costs have gone up nearly 9% this year over last, and can cost up to about 2% or even 3% of the loan. (For example, it would cost $4,000 to possibly even $6,000 to close on a $200,000 mortgage).
Is a “no-cost” refi free then?
No. There’s always a cost! The hit might come in form of a higher loan balance (They’d just bundle the costs on top of your loan amount, increasing the size of your loan), or a higher interest rate (which is more damning over the long haul since your entire mortgage balance is exposed to the higher rate). How much higher? Anywhere from one eighth of a percentage point to one half a percentage point more than if you paid the fees upfront.
Who should do it?
If you don’t have the money readily available to cover the costs or are looking to preserve your cash position (Perhaps you’re fearful you may lose your job?), consider doing a “no-cost” refi. But if you have the funds at your disposal, paying the fees yourself — upfront — is the better option. Regardless, when altering your mortgage, you should always crunch the numbers online (there’s a great refinance calculator on the Zillow iPhone app, keeping in mind that a refinance, in general, should only be considered if you have ample equity in your home (at least 10%), plan to stay in the home for a minimum of three years, and can lower your interest rate by half to three quarters of a percentage point.
Vera Gibbons is a financial journalist based in New York City and is a contributor to Zillow Blog. Connect with her at http://veragibbons.com/.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.