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ABOUT THE LATEST MORTGAGE RATES
Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.
Low mortgage rates can help prospective homeowners save on interest, but rising home prices can eclipse the potential savings. Housing prices are trending upwards due to a shortage of homes, higher demand, and increased competition among buyers. Without a larger down payment to offset these higher prices, homeowners may end up taking on a larger loan with larger monthly payments. And amid rising house prices and low rates, new mortgage applications saw a 2.4% decrease last week.
Although refinance applications dropped 4% last week, existing homeowners are in a good position to benefit from these low rates with a refinance. Rising home prices and low refinance rates provide homeowners equity advantages, such as refinancing to remove PMI payments or a cash-out refinance to pay off high-interest debt or fund a home improvement project.
However, a refinance does come with closing costs, an additional set of fees that can either be paid upfront at closing or incorporated into the loan as a no-cost closing option. No-cost closings are convenient since they eliminate the need to pay any fees upfront, but they come with warnings and red flags to watch out for.
What Is a No-Cost Closing
Lender and third-party fees are typically part of the closing costs associated with refinancing. These fees generally range between 3% and 6% of your loan amount. You’d normally have to pay out of pocket at closing. However, a no-cost closing can help you avoid that step.
With a no-cost closing, you are not required to pay for anything upfront. This kind of mortgage works in two ways.
- The amount of closing costs could be added to your new loan amount. You will pay interest on the total loan amount, including closing costs. You don’t pay interest on closing costs paid upfront.
- The lender may offer a higher interest rate in exchange for a one-time credit to cover your closing costs. While the higher rate may offset closing costs, the borrower cost may not be better.
For either option, some lenders are transparent with the fees involved and others may not be. The total cost to the borrower may not be mapped out for you, but the costs of a no-cost closing will be passed on to you one way or another. Make sure to shop lenders and crunch the final numbers using a calculator to see which option works out best for you in the long run.
No-Cost Closing Refinance Example
To better understand the differences between a no-cost closing and one with closing costs paid upfront, consider the following example of a $350,000 loan amount with $14,000 in closing costs.
|Refinance Loan Amount||Closing Costs (4% of Loan)||Interest Rate||Total Interest Paid (Over the 30 years)|
|Loan A(Closing Costs Paid Upfront)||$350,000||$14,000||3.125%||$190,000|
|Loan B (No-Cost Closing)||$364,000||N/A||3.125%||$197,000|
By paying the closing costs upfront, you’ll end up paying total interest charges of $190,000 over the life of the loan. On the other hand, by opting for a no-cost closing and rolling the closing costs into the loan amount, you would have a larger loan of $364,000 and end up paying $197,000 over the life of the loan.
With a no-cost closing, you won’t have to come to the closing with any lump sum to finalize the loan. However, you do end up borrowing $14,000 more on the loan and paying nearly $7,000 more in interest charges.
Before refinancing, you’ll also want to think about when you might sell the house. If you have plans to sell the house before you reach your break-even point on closing costs, you may end up paying more in the long run.
The Pros and Cons to a No-Cost Closing Refinance
Whether a no-cost closing is right for you depends on your personal goals and circumstances. Here are a few pros and cons to consider:
No cash paid out of pocket, eliminating any need to save for closing costs
Not disruptive to your regular monthly cash flow
Helps you keep more cash on hand for emergencies
Great for a home you may not own in the long run as you could still save money on your monthly payment without paying for anything out of pocket
Loans typically have higher interest rates, higher loan amounts, and higher monthly payments
You will most likely end up paying more interest charges over the life of the loan
May not be the best option for a mortgage you intend on keeping for the long run