If you're considering refinancing your home, lenders that offer refinancing with no closing costs can be very appealing. Closing costs are required upfront, meaning you must pay them before the loan funds can be received. Lenders that offer no closing cost refinancing agree to pay the upfront fees. This can be especially attractive to the lender who simply cannot afford the upfront costs. However, there are some things to consider before applying for this type of loan.
Higher Interest Rates
Unfortunately, lenders rarely do things out of the kindness of their hearts. If they are going to pay your closing costs, they are going to want something in return. In this case, it usually means a higher interest rate. The lender will pay your closing costs, and, in return, they will charge you an interest rate up to 1% higher than the rate you would receive if you paid the closing costs in the traditional manner. This can save you money if you only plan to keep the loan for a short period of time—a few years at most—but more often it will end up costing you more in the long run. Borrowers who are considering paying a higher interest rate in order to avoid paying closing costs should first estimate the amount of interest that will be paid in both circumstances over the lifetime of the loan.
Negotiations with Current Lenders
Before shopping around for a new lender, discuss your plans with your current mortgage holder. They may be able to offer a refinancing loan that suits your needs. If you have been a reliable customer and have established good credit with the company, they will often waive some of the upfront fees in order to keep your business.
Fees Included in Loan Amount
If you simply do not have the cash to pay the closing costs upfront, your lender may allow you to include them in the balance of your loan. Though you will have to pay interest on them, the interest on these fees is likely to be less expensive than a higher interest rate for the life of your loan.
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