So, you are a homeowner, you notice that the mortgage rate is below 3%, which will save you hundreds of dollars a month – and you are ready to refinance.
But are you ready for what the new loan will cost you?
The closing costs for refinancing loans average $ 3,400, including taxes, according to the consulting firm. ClosingCorp…
In other words, you should calculate that clearance fees, appraisal and inspection fees, credit report fees, and all other typical closing costs will add up. 2% to 6% from the loan amount. This means that if you refinance a loan balance of $ 200,000, closing costs can range from $ 4,000 to $ 12,000.
You can deal with these costs by opting for a so-called zero closing cost mortgage or a zero closing cost mortgage. Loans won’t magically make expenses disappear, but paying them off can be less painful.
How refinancing works without closing costs
Don’t let the name fool you. Although this is called a “no closing cost” mortgage, you still have to pay the closing costs, but not immediately in a lump sum.
Instead, you have two ways to get rid of the various fees.
By adding them to the loan amount. If your refi loan is $ 200,000 and the cost to close the deal is $ 6,000, you are actually borrowing $ 206,000.
Taking a higher interest rate on your loan. Your lender can cover your final costs if you agree to pay a higher mortgage rate. On the same $ 200,000 loan, a lender offering you a 30-year fixed rate mortgage at 3% can waive the commission if you take the 3.5% rate instead.
Benefits of refinancing without closing costs
A big plus in avoiding closing costs is that you can get a new mortgage without delay, even if – in today’s COVID-19 economy – you find it difficult to scrape together the cash to pay the closing fees.
Low rates still exist, but you may have to go shopping to find them… One of America’s largest home lenders, United Wholesale Mortgage, continues to advertise 30-year fixed rate mortgages available for refinancing with rates starting at 1.999%.
A homeowner who can get a low rate shouldn’t pay too much attention to closing costs, says Grant Moon, CEO and founder of the mortgage fintech firm. Home captain…
“Instead, borrowers should consider how much money they will save by refinancing,” says Moon.
And the savings can be significant. Recent Zillow review found that nearly half of homeowners who refinanced between April 2020 and April this year now save $ 300 a month or more.
If you need a loan without closing costs to achieve this type of refinancing savings, many lenders will offer you this option. If you happen to find a lender who doesn’t, just keep shopping.
Disadvantages of Refinancing Without Closing Costs
The big disadvantage of a “zero closing cost” mortgage is that you stretch out the payment of closing costs for years – and may end up paying a high price for the privilege.
This is how it goes with the two options listed earlier:
Add closing costs: Let’s say you get a 30-year refinancing loan at 3%. If you borrow $ 200,000, your interest in life is $ 103,601. If you borrow $ 206,000, including closing costs, your interest over time will be approximately $ 106,774 – another $ 3,173. Your $ 6,000 to close will cost you nearly $ 9,200.
Costs to close a trade at a higher rate: Again, a $ 200,000 30-year refi at 3% will cost you $ 103,601 in interest over time. That same loan at 3.5%, with closing costs included in the rate, will cost you $ 123,337 in lifetime interest – $ 19,736 more. Your $ 6,000 to close will cost you nearly $ 26,000.
According to David Demming, a financial consultant based in Aurora, Ohio, this math makes getting a loan at no extra cost a “stupid decision.” He tells LendingTree that this only makes sense if you don’t plan on staying home long.
It’s ultimately a personal decision, ”says Danny Frio, manager of the Oakbrook Terrace, Illinois Preferred Rate division.
“It depends on the cost and length of time that the client plans to live in the home and hold on to this new loan,” says Frio. “We analyze each client … and then we give the client our opinion, and then we see which he prefers, since he is the main boss.”
The first step of a potential refinancer is get an ultra-low refinancing rate it is still possible. Later, you will have enough time to think about the final costs and how you will pay them.
A few final points to consider: some closing fees can be negotiable, or you can offset some of the costs by finding savings elsewhere – for example, by comparing purchases. to insure your homeowner…
This article provides information only and should not be construed as advice. Provided without warranty of any kind.