No Closing Costs Refinancing ExplainedDoes it make sense to have a no closing cost refinancing of your mortgage?
Refinancing With No Closing Costs
When mortgage rates are going down it could make sense to do a no closing cost refinance. With a zero closing cost refinancing you don't actually take any money out of your pocket. That is the beauty of this type of refinancing.
Of course, you are thinking nothing is free and certainly not from a lender. Well, that is true. There are no giveaways when it comes to home mortgages. What happens with a no cost refinance is the closing costs are built into the rate you would be paying.
For example, let's say the interest rate on a 30 year fixed rate mortgage is currently 3 percent with points and closing costs. If you want to refinance without points and closing costs your interest rate charged by the lender might be in the neighborhood of 3.5 percent. What if the current interest rate of your mortgage, however, is 4.25 percent?
In this scenario, you could go from having a 4.25 percent mortgage and drop to 3.5 percent without taking any money out of your own pocket. Moving forward the 3/4 percent reduction in the interest rate would be saving you a lot of money from month to month. Doing a refinance without paying any closing costs makes the most sense when you don't plan to be in the home for a long time but would like to save a bit of money.
Some folks wonder if this makes sense when you have a 30 year mortgage but have already paid for 5 years. They wonder if when they refinance they need to go back to the full thirty year term. The answer is no you do not. When you refinance, you can ask the lender to amortize the loan over the period of time you would like.
So for example, if you only have 25 years left of your mortgage at the current time, when you refinance you would ask the lender to amortize the loan over 25 years. Some actually will drop down the time frame on their loan. Maybe you would like to end your mortgage 20 years from now instead of 25? Many lenders are now much more flexible when it comes to the time frame of a mortgage.
When refinancing you might also want to increase your loan balance for some improvement to make around the home. Home improvements are a great reason to refinance. You can kill two birds with one stone by lowering your rate while also taking some of your equity to make that addition you've always wanted.
There are in fact many reasons why a no closing cost refinance might make sense. In the article at Maximum Real Estate Exposure which is referenced above you will see everything you need to know about no cost refinancing. If, however, you plan to stay in the home for many years, it might make sense to pay the closing costs so that you have the lower interest rate.
Take a look and if you have any questions I would be happy to try to help answer them. Everyone's financial circumstance is different. Whether you pay closing costs or not will be dependent on your finances.