No cost refinancing a.k.a. no cost refi

January 2nd, 2018

No cost refinancing, does it exist?

I frequently have people ask me for “one of those no-cost refi’s”. Some people think that mortgage lenders are so hard up for business that they are willing to lose money and simply pay the closing costs for the mortgage borrower. I don’t know of any businesses where losing money is part of the process of making money. A no-cost refi actually comes with a cost…a higher interest rate.

The reality is that a no-cost refi is one where the closing costs are built into a higher interest rate. Hence, if you hear of a mortgage company that can offer you a 4% refinance with closing costs, then they’re going to tell you for a no-cost refi it would be a slightly higher interest rate with no closing costs.  They’re not going to hold the interest rate at 4% and simply waive the closing costs.

Below you will find an example of two scenarios to learn more about how no-cost refi’s work:

Refinance scenario with closing costs refinanced into the loan (example only for demonstration purposes):

  • $400,000 owed on current loan
  • 4% 30 Year Fixed hypothetical rate quote
  • $4,000 in closing costs to the title company, lender, appraiser, etc.
  • $404,000 new loan amount so that the costs are financed into the new loan amount.
  • 1928/month mortgage payment (not including taxes and insurance)

Refinance scenario with no direct closing costs, and a higher interest rate  (example only for demonstration purposes):

  • $400,000 owed on current loan
  • 4.25% 30 Year Fixed hypothetical rate quote
  • $0 in closing costs to the title company, lender, appraiser, etc.
  • $400,000 new loan amount
  • 1967/month mortgage payment (not including taxes and insurance)

Refinance scenario if you elected to pay cash for the closing costs (example only for demonstration purposes)::

  • $400,000 owed on current loan
  • 4% 30 Year Fixed hypothetical rate quote
  • $4,000 in closing costs to the title company, lender, appraiser, etc. (PAID IN CASH)
  • $400,000 new loan amount
  • 1909/month mortgage payment (not including taxes and insurance)

You need to consider how much longer you will live in the property, and the different monthly payments, before you determine if it’s worth it to take a higher interest rate to offset the closing costs or to finance your closing costs into a higher loan amount. When refinancing it’s important to consider your life of loan costs.

Start with a rate quote and I can help you figure out the best loan for your situation.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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