If you’re considering refinancing, you will inevitably come across lenders who use the term “no-cost financing” to lure you in and win your business. However, as you probably suspect already, no-cost financing doesn’t exactly mean that.
So what do lenders mean by that term? Definitions of “no-cost” financing or refinancing vary from one lender to another. Be diligent about asking each lender what their specific terms are. In general, there two ways you can avoid paying fees upfront.
The first way is when the lender will cover all closing costs. However, this means that the interest rate you’ll be charged will be higher. And you will have to pay that rate for the entire life of your loan. Some advice is to ask your broker or lender to give you a comparison of all the up-front costs, interest rate, principal, and payments both with and without the trade-off.
The second method consists of having all refinancing fees “rolled into” your loan. This way, the fees are included in the amount of money that you borrow and you will not be required to make any cash payments upfront. Instead, you will have to repay the fees with interest throughout the life of your loan.
Our advice is that when lenders offer you a “no-cost” financing solution, they are probably including a prepayment penalty aimed at discouraging you from seeking to refinance your loan over the next few years. Always ask a lender that offers such deals to thoroughly explain all the penalties and fees that are involved before agreeing to the terms of the loan.
“Breaking-even”– how long does it take?
It is always important to carefully calculate your financial benefits for refinancing in 1-3 years. What are your plans for staying in your home? Compare these factors to determine the benefits.
Basically, if you plan to continue staying in your house until you pay the mortgage, you will need to find out the total interest that you will have to pay under both your old loan and a new one. How do the numbers compare?
Comparing the equity you would build up under both loans is also a wise move. More of your payment goes towards the principal, helping build equity if you’ve had the current loan for a long time. On the other hand, if you have a new loan with a longer term than what remains of your old loan, you will find that less of the payments go towards the principal. This will slow down the build-up of equity of your home.
Refinancing calculators
Mortgage calculators available online are very helpful to calculate the effects of refinancing a loan.
The can calculate the effect of refinancing your mortgage by using online mortgage calculators. Such calculators typically ask for details about your mortgage (interest rate, remaining principal, term of the loan, number of years remaining, etc.), as well as the specifics of the new loan you are considering (interest rate, principal, term, etc.) and the upfront costs or closing costs on the new loan. The best mortgage calculators also require information about the tag and interest rates you can get on your savings investments. They’ll show you how much money you will be able to save versus how much you pay over time. This can help you determine whether refinancing is the best decision for you.
How to be a smart refinancing shopper
It’s a smart idea to take your time when deciding on a home loan, to get the best deal available. Shopping around and comparing available offers will ultimately save you thousands.
The first thing you should do is get a copy of your credit report and make sure it contains accurate information. Also, don’t be afraid to let lenders know that you’re looking for the best deal, this will often encourage them to make you a very good offer.
Discuss with your lender first
Your current lender should know as soon as you begin considering refinancing. Since they will most likely want to determine you to stay with them, you might be able to negotiate reducing or eliminating some of the fees involved with refinancing. These are usually fees involved with a title search, surveys, and inspection, but may also extend to include application or origination fees if your current mortgage is new.
So always make sure to tell your lender that you’re looking for the best deal available: they will want to compete with other lenders for your business.
Be a comparison shopper
Always compare all terms offered by different lenders, including costs and interest rates.
Lenders are actually required by law to give you an estimate in three days after they receive your application for a loan. Do not forget to ask about the costs of closing a loan ad well. Make sure to carefully review all documents and compare all loans and their costs. You can even request to see the HUD-1 settlement cost form – you can do that one day before signing the final documents and closing the loan.
We advise you to carefully verify that the rate given by your lender is indeed the rate you will get when signing the loan. You may even ask for a rate commitment or mortgage lock-in put into writing. Also, make sure that all costs and obligations are explained before signing your name to anything.
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