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Costs of Refinancing

by Craig Romero, Mortgage Analyst,

Homeowners looking to refinance are being hit with the option of “no cost” refinancing. It is extremely appealing to homeowners who do not have the cash on hand to pay the costs of conventional refinancing or refinancing through an up front mortgage broker.

But does “no cost” refinancing actually come with no cost to the borrower? Not always. When the big picture is taken into account, some “no cost” refinancing actually has costs that are pretty steep, but well hidden. Most no cost financing options will have you paying ½ a point to 5/8 of a point more in interest than you would with a full-cost loan.

Is there ever a good reason to take advantage of a “no cost” refinance? Yes, if the interest rate you are paying now is significantly lower than the current “no cost” refinance rates. You may also want to consider this type of financing if you plan on being in the house for a short period of time, say from one to three years.

If you are not sure how long you are going to be in your home, it is still okay to pursue a no cost loan, and if you wind up staying in the home for a long period of time, you can refinance at a later date.

For borrowers who are considering a no cost refinance because they can not afford the costs to refinance, dig a bit deeper. Many times when you refinance you can roll the costs of your refinance into your loan, enabling you to refinance without a large amount of money up front.

If you do decide to opt for a no cost refinance, make sure that you are truly getting a no cost, and not a hidden cost. With a no cost loan, you will not be paying the lender fees or settlements; the lender pays for these without increasing the cost of your loan. You will however be responsible for per diem interest and escrow costs, though your escrow costs will be credited at closing by your old lender.

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