No Closing Cost Refinance

Many homeowners consider refinancing an essential way to save money on mortgages and get cash from the equity in their properties. While refinancing has important benefits, most owners don't want the financial burden of paying the closing costs of new loans. Choosing no-closing-cost refinancing provides upfront savings, but you should know how the process works before you decide to go this route.

Why Are Homeowners Refinancing?

In data provided by Freddie Mac in 2021, 33% more homeowners refinanced loans in the first half of the year than during the same period in 2020. Most homeowners who consider refinancing do so because they want to reduce their mortgages, lower interest rates on their loans, acquire cash to eliminate debt, or make home improvements. In recent years, with home prices rising considerably across the country and skyrocketing in some markets, people who own homes take out cash by borrowing against the equity in their houses through refinancing or home equity lines of credit.

Refinancing is a popular way of saving money because the interest rates on these loans are typically lower than on HELOCs. Moreover, even when you pay a higher interest rate, it could still present a greater cost savings than a home-equity credit line.

What Are Key Things To Know About a No-Closing-Cost Refi?

No-closing-cost refinancing allows borrowers to reduce interest rates and mortgage payments for long-term loan savings. However, while closing costs are not due initially, they are paid over the life of the loan. This is an important consideration for parties interested in this refinancing opportunity. As a borrower, you shift closing costs into your loan's principal or accept a higher interest rate.

For this to be a sensible choice, the overall loan savings or interest amount must offer better terms than the original loan. The most straightforward terms for a loan with no closing costs involve tacking the refinance costs on your new loan principal. This option increases your mortgage payments, but your interest rate stays the same. The other option is choosing a higher rate of interest that doesn't impact the loan principal but does push your monthly payments higher.

What Are Types of Closing-Cost Fees?

When you choose to refinance, there are various fees associated with closing. As you may recall from the initial loan, these fees are a significant part of your loan balance. In 2021, average closing costs were $6,905 with title transfers. These are standard closing-cost fees:

Loan Origination

This is the fee a lender charges to prepare a loan. This fee covers administrative, underwriting and application costs.

Appraisal

Most lenders require a new appraisal when underwriting loans to assess the current condition and value of the property when you refinance. A lender uses this information to determine the risk involved in approving a refinance.

Title Transfer

A refinance is a new loan, so you must pay for a title search and a lender's title insurance policy like you did on your previous loan. In most cases, if you use the same title company, you are likely eligible for steep discounts on fees as a returning customer.

Credit Report

Lenders check your credit score to identify any changes in your financial standing. They will look at payment history and debt amounts. Many pass this cost to the borrower in closing.

How Does a Federal Housing Administration Mortgage Refi Work?

The FHA does allow borrowers to refinance loans. However, the closing costs are not rolled into the loan as with a conventional refinance. Instead, a maximum loan amount is reached by subtracting the maximum insurance premium from the unpaid principal and then adding the new MIP costs. Here's how the FHA handles streamlined refinancing:

• The borrower must already have an insured FHA loan.

• The mortgage must not be delinquent.

• Refinancing has net borrower benefits.

• No more than $500 cash is taken out on a mortgage refinance.

An FHA refi may not require out-of-pocket expenses and instead charge a higher rate of interest to the borrower. The lender uses this premium to pay the closing costs.

Is No-Closing-Cost Refinancing the Right Choice for You?

Before you leap, here are three things to think about when opting out of paying closing costs:

1.  What Is the Loan-to-Value Ratio?

If you have considerable equity in your home and the appraisal value is high, these factors substantially help balance your loan-to-value ratio. If your LTV is high, adding additional costs to a loan is not a good plan. It is risky because market fluctuations could cause your mortgage to become upside down with a home loan higher than the property value. Speak with your lender about the right no-closing-cost option to fit the circumstances that won't cause you to risk an unmanageable outcome.

2. Do You Plan To Stay in Your Home?

If you reduce your housing costs over the life of your loan, no-closing-cost refinancing that is added to your principal is a prudent choice. Regarding higher interest costs, sometimes it works best if you don't plan to stay in a home for the long term. With a higher interest rate, if you sell after a few years, the amount your pay in interest could be less than assuming the closing costs of a loan.

3. How Will Interest Impact Your Financial Condition?

A slight increase in interest significantly affects the overall amount you pay on a mortgage. It is important to carefully review your budget with your short- and long-term goals in sight. A responsible lender usually scrutinizes your financial picture before writing a loan, but you should be proactive in the process. Protecting your financial security and making a good decision when refinancing at a higher interest rate is crucial. Talk with your lender to ensure what works best for your situation.

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