No cost refinances, no cost mortgage refinances or no point and no fee refinances all these refer to the same thing, a mortgage refinance that have a minimal closing costs.
To close a traditional refinance mortgage,
you do need to pay for things for instance the title search, title insurance, attorney's fees, flood certification fees, courier fees, recording fees, etc. On a no cost mortgage refinance, the lender foots the statements for these expenditures without raising your loan balance.
Mortgage refinancing from a new financer comes with closing costs. They are of two types: recurring and non-recurring. Application fee, lender fees, title search, broker commission, escrow fees, and recording charges are included in non-recurring closing costs. Whereas, recurring closing costs include interest, property taxes, and insurance. The borrower can pay the amount as a lump sum fee at the time of closing the deal, or it can added to the mortgage, and repaid over the reimbursement duration. A no cost loan will attract a higher rate of interest on the mortgage as compared to the normal “no points” mortgage. The rise in interest rates is typically around .250% to .500%.
No closing cost refinance is useful for people who do not have enough cash in hand, or who intend to purchase the property for a few years only. One can calculate the difference in the total payment for a no cost loan and a loan with costs. Divide this excess amount into the non-recurring costs one will have to clear at closing. This simple calculation can determine how many months it would take to regain the outlay of the closing costs. One can compare this duration to the period one intends to own the property, and find out what is profitable.
Here is an example to understand the pros and cons of no closing cost mortgage refinancing. Let the loan amount be $300,000.
Option A – No cost loan, interest rate of 6.25%, and monthly payment of $1,847
Option B – A zero point loan, interest rate of 6.00%, and monthly payment of $1,799
Non recurring closing costs - $2,800
Comparing these two cases, the difference in monthly payments come out to be $49. If one divides this amount across the closing costs of $2,800, the number of months required to re-coup would be 58. That is, it would require less than 5 years breaking even the costs of a no cost loan and a zero point loan. In this scenario, no closing costs loan is a better option.
Let’s compare two other cases.
Option A - No cost loan, interest rate of 6.25%, and monthly payment of $1,847
Option C - One point loan, interest rate of 5.75%, and monthly payment of $1,751
Total non-recurring closing costs (including point) - $5,800
The difference in monthly payments would be $96. Dividing it into the $5,800 closing costs the period to re-coup turns out to be 5.01 years. Even in this case, for an individual intending to own the property for few years, no cost loan makes more sense.
Pro & Cons for No Cost Refinance
The main benefits of availing a no cost refinance is that it could save thousands of dollars in some situations. Depending on the number of years that you are going to avail your loan for, possibly you might be able to find good deal when availing this type of plan. It all depends on the economy and what you are being presented though, if you’re able to come up with a unique way to refinance which are more gainful to you, then you should always get it.
