What is a No Cost Refinance?

As consumers, we are bombarded with advertisements about no closing cost refinances. We hear about them on the radio, see commercials for them on TV, maybe even receive mail about them. So what are they? How are these institutions able to offer them and still earn a living? The remainder of this post will dive into the ins and outs of a no cost refinance.

So what is a No Closing Cost Refinance?

Mortgage lenders and mortgage brokers are able to offer interest rates to consumers that are slightly higher than the cost of those funds to them (read par or market rate). In turn, they are able to use the difference (premium) that they receive to pay for closing costs and their own compensation. You see, no matter what lender or mortgage company you choose to work with, their are costs associated with closing a loan. A majority of these costs are paid to a third party such as an appraiser, title company, or surveyor.

When does it make sense to pursue a No Closing Cost Refi?

During markets like what we are seeing right now with interest rates at relatively low levels, no closing cost refis become extremely attractive as a means for homeowners to lower their interest rate and monthly mortgage payment. If a homeowner is able to lower their interest rate 2% and save $300/month on their mortgage payment AND pay no closing costs to acheive this, oftentimes it makes good financial sense.

Now, as long as we are talking about no closing costs, it is worthwhile to explain exactly what this means. When you close a loan, you have closing costs and prepaid items. Closing costs are fees that are paid to the parties involved in arranging your transaction. Closing costs are not required to be paid in a no closing cost refinance. Prepaid items are things such as prepaid interest (interest on the new loan because mortgage payments are made in arrears), hazard insurance (if you are within 3 months of renewal or if you choose an escrow account), or property taxes (if you close at the very end of the year and taxes are due or if you choose an escrow account). In a No Closing Cost Refinance, borrowers will be required to pay for pre-paid items as they will need to be paid whether the homeowner refinances or not. These items are typically included in the new loan amount.

To find out if you are a good candidate for a No Closing Cost Refinance visit http://www.noblelenders.com/ and click on the No Closing Cost Refinance section at the bottom of the home page. Also take a look at the mortgage calculators that are available under the Noble Tools drop down menu.