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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About No Closing Costs Refinance
Does zero closing costs or no closing costs refinance really exist? The answer is yes, but the key is understanding how they work.
Many people who are looking to refinance come across this option of zero closing costs or no closing costs refinance. In this post, we will dive deep into what is the zero closing costs or no closing costs refinance and the truth about them.
What is No Closing Costs Refinance?
No closing costs refinance implies not paying any fees when you refinance. However, that is not entirely true. The way lenders do this is, they structure your loan to get what is called a “lender credit.”
When you refinance, there are always costs associated with it, and someone has to pay them. A lender typically has fees like underwriting fee, processing fee, credit report fee, appraisal fee, etc.
These fees are usually added back to your loan amount when you refinance with the lowest possible interest rate that the lender can give.
However, if you choose for zero closing costs refinance, the lender would give you a lender credit to cover these fees and increase your interest rate to offset your closing cost.
If you look at it in a way when doing a no closing costs refinance, you are the one who is paying the closing costs.
The only difference is you don’t have to pay them at the time of closing; rather, you would pay that in the form of increased interest until you refinance or sell your property.
Apart from that, you would also have to pay escrow reserves, title charges, and prepaid.
Understanding the No Closing Costs Refinance
Whenever you buy or refinance your home, there are very real and tangible costs involved, fees such as surveys, title fees, government taxes, and homeowner’s insurance. These costs are very real.
The key to this is understanding as a consumer how much more are you paying, in your interest rate to generate that lender credit. It is not the case that you are going to get the loan for free, you as a borrower are going to pay for it.
It would make more sense to get a no closing costs refinance when you don’t have enough funds and would not like to increase your loan amount.
For example, if you found your dream home and the seller refuses to pay closing costs and you only have enough money for a down payment, a no closing costs loan could be a better option.
Many borrowers use no closing costs refinance as strategic financing. Even after having enough funds to cover the closing costs, they go for closing costs refinance and utilize the interest rate credit.
The thought behind getting zero closing costs refinance is after doing the break-even analysis, and you can decide how long you are going to have this loan, maybe three to five years.
And in this analysis, you conclude that the increase in payments is far less than the amount of credit you can get today, making no-costs refinance an excellent strategic financial tool.
Conclusion
Looking at the structure of no closing costs refinance or zero closing costs refinance, it is evident that the borrower is the one who pays for the closing costs in one way or the other.
No closing costs refinance could be an option for borrowers who look at it as a necessity.
However, it is very crucial to know that if you are opting for no closing costs refinance, your interest rate would be higher than you could have qualified for otherwise.
