Are There Really “No Closing Cost” Refi’s?

Those “no cost” refinance deals, while real, are a bit misleading. They are usually advertised on cable TV or radio, and are short on details. What they don’t tell you is that they charge a higher rate for a “no closing cost” refi.

How does it work?

So the costs are essentially built into the rate. If market rates are 4.75% w/ 0 points (and with necessary costs being charged) you may end up with 5.125% w/ 0 points and 0 costs on a “no cost” refi, for example. While there are literally no “closing costs” paid directly by the consumer, there is a “cost” actually.

Does it ever make sense?

So its a bit gimmicky. But for some people, those currently with higher rates like 6.25% and up, it may make sense to take a higher rate and pay no closing costs. But most people want the lower rate. It is a program more designed to make the phone ring, then they switch you into something else after they tell you the catch (if they tell you the catch).

Recapture period

To me, it is all about recapture period. If I can recapture my closing costs within 10 months, for example, measuring my monthly savings against the closing costs ($3500 in costs to title company, lender, appraiser, etc, for example, versus $350 a month in monthly savings, is a 10 month recapture period), and I believe I will own the house for 5 years from the date of the refi, I’d opt for the lower rate and paying the closing costs. However, if I was going to move in 2 years, and it took me 14 months to recapture my costs, I may take the higher rate and the “no closing cost” deal.

As usual, it is imperative to ask a lot of questions before making a commitment, especially after briefly seeing a short commercial making grand claims.