When should I refinance myself with a no-closing-cost mortgage?


The idea of ​​getting a no closing mortgage loan may seem too good to be true, but they are out there if you look carefully enough.

Money expert Clark Howard believes that borrowers who don’t have the cash to pay for the closing costs of traditional refinancing shouldn’t give up. He says they’d be better off accessing the money through a loan with no closing costs – even if that means they’ll have to pay a slightly higher interest rate.

In this article, I’m going to go into what a no-cost mortgage is, where to find a mortgage that Clark thinks is a good candidate, and compare it to some other products on the market.

What is a no closing cost mortgage?

As the name indicates, A no closing fee mortgage is a home loan that does not require the borrower to pay any of the fees associated with closing the loan.

You can call it a “No Credit Mortgage”, “No Closing Loan”, or “Free Refinance”, but they all mean the same thing. You don’t have to pay the closing costs upfront, but you do pay a higher interest rate.

When you borrow with these types of loans, you probably don’t owe anything out of pocket for things like:

  • Origination fees
  • Title fees
  • Prepaid Interest
  • Discount points

These costs can add up quickly. According to a recent study For US mortgage refinancing, the national average acquisition cost is $ 5,749.

In return for this delay, you can expect a higher interest rate than someone who pays the closing costs out of pocket or pays into their new loan.

Clark says you can expect the interest rate on a free refinance to be about 0.5% to 0.625% higher than the market rate on a traditional loan with closing costs.

Clarks 3 Types of Candidates for a Free Refinance

You are probably wondering if you should buy a free refinance and when is the right time to do it.

Clark says there are three different types of homeowners that are particularly good at getting a free refinance rather than shopping at the lowest possible interest rate.

1. You don’t have the money to pay the closing costs

If the record low interest rates piqued your interest – but you don’t have the money to pay the closing costs – you are probably the best candidate for this type of loan.

“A lot of people fall into this category, believe it or not,” said Clark. “There are a lot of people who would benefit from a re-fi, but they just don’t have the money to do it.”

If you don’t have thousands of reserve funds but can find a zero closing rate that is below your current mortgage rate, this type of loan is for you. And you would likely see savings on monthly interest debt right away.

2. You don’t know how long you want to stay in the house

Do you work outside of your hometown and not sure how long you will be staying in your current city? Are you considering taking this new job offer away from a few states?

Clark says you could potentially benefit from a loan refinance with no closing costs.

With a closing cost refinance, you may get a lower interest rate, but there comes a time when you need to amortize the cost of the new loan with interest savings.

If you sell the home before you have paid off those costs, a traditional refinance may have cost you money, despite the lower interest rate.

However, a loan with no closing costs allows you to get immediate savings on the interest owed.

3. You know that you will be in your house for a short time

If you know you will be moving out of your home soon, Clark says this is the one just Type of Refinancing You Should Consider.

“This could be someone who knows they’ll be home for a relatively short time,” said Clark. “With this type of loan, you can save money right from the start.”

Clark has one 30-month break-even rule. It says that you can amortize your mortgage refinancing costs with interest savings within the first 30 months of a new loan. But if you know you won’t be in a home for at least 30 months, the decision to avoid refinancing costs is almost certainly a good one.

Even if those savings are less than what you would get with a better interest rate, they’ll show up in the first month if you’ve chosen to refinance with no closing costs.

No closing cost loan vs. rolling closing cost in mortgages

There is another alternative for borrowers who do not have the cash to pay the closing costs.

Many lenders let borrowers “flow” the closing costs into their new mortgage. In other words, the bank is providing you with the money in exchange for allowing you to charge interest on the amount that you have pegged on the loan.

Clark says this is not wrong, but he prefers the no closing cost method because including the closing cost in the loan could create an equity problem if you have to sell the house long before the loan is repaid.

“I’ve never been a fan of people who put the closing cost into their loan because then you increase the loan balance and you pay interest on a higher loan balance,” Clark warns. “And if you end up being a short-time worker there, you will have less equity in your house when you sell it.

“There is nothing wrong with doing it this way, I just think it is better to take a higher interest rate than take a larger balance on your loan.”

You can use Clarks Mortgage Refinancing Calculator to find the break-even point (in monthly payments) for including closing costs in your mortgage. If there is a chance that you will be moving before that time, a no-closing-cost loan would be a better refinancing option.

Where to look for a mortgage with no closing costs

Not all lenders don’t offer closing expense refinancing, so you may need to search a little to find one.

“In general, you won’t find closing fee refis with mortgage brokers and credit unions,” says Clark. “Most mortgage brokers can place you that way if you ask, but not all credit unions don’t have closing cost loans.”

Clark doesn’t endorse any particular mortgage broker. He says it’s best to look for reputable brokers in your community or go online for a handful of quotes.

I did a little research and found that the US bank had a no acquisition cost refinancing program this can be a good example of what to expect on the internet.

But that’s just an example. Because of the potential for exorbitant fees and excessive interest rates, Clark doesn’t want you to look for a refinanced mortgage, but rather a ‘big bank’. “

“Most of the big banks won’t do that [no cost re-fis], but big banks are terrible choices for mortgages anyway, “says Clark.

Nobody can avoid this new mortgage fee

From December 2020, the federal housing finance starts loading a new 0.5% fee for most mortgage refinancing loans.

It is known as the adverse market finance fee. Clark says it is a federal government effort to build a “war chest with reserves” in case foreclosures increase due to the COVID-induced economic downturn.

Whatever the reason, this fee will cost an additional $ 1,500 when refinancing a $ 300,000 loan, for example.

Some people may be looking for no closing fee loans to get around this new fee. Clark says this is a pipe dream: mortgage lenders will simply incorporate the cost of the fee into the interest rate they offer on the no-closing-cost option.

“It does not affect your decision about the type of loan you should get,” says Clark. “This will be another expense built into the cost of a loan. Either you write a check when you close, or you pay it with an increased interest rate in the option with no closing costs. “

However, Clark says the fee could move the break-even point for closing costs to a point where more people could benefit from the no-closing option.

Final thoughts

If you fall into one of the three categories of borrowers that Clark says are candidates for a no-closing-charge loan, action should be taken by contacting a local mortgage broker or credit union to compare interest rates.

You can also use Clarks Refinancing calculator for mortgages to see how different types of loans meet his needs 30-month break-even rule. If break-even is short-term and you have the cash to pay for the closing costs, you are probably better off choosing the lower interest rate that comes with a traditional mortgage.

However, if you are unsure about your future in your home and can lower your current interest rate by refinancing with no closing costs, then moving on to this option is an easy decision. You will see interest savings from the very first payment.

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