A no cost refinance mortgage seems enticing to a lot of people. They figure that they have nothing to lose since they do not have to foot any costs in refinancing the mortgage. They are able to refinance at a lower interest rate or get extra cash from other expenses without having to spend any money. However there are certain advantages, drawbacks and features of a no cost refinance mortgage that you must know about and consider before choosing this kind of a mortgage for refinance.
What Is a No Cost Refinance Mortgage
A no cost refinance mortgage is typically a mortgage where the borrower does not have to pay any of the closing costs. All the fee including the processing fee, application fee and closing costs are paid for by the lender. It is another matter that this amount may be included in the sum of the original mortgage.
Disadvantages of a No Cost Refinance Mortgage
While this may seem like a win win situation to the consumer it is not necessarily the case. The main drawback of a no cost refinance mortgage is that since the lender is paying for the closing costs of the mortgage, he seeks to recover his money by offering a slightly higher rate of interest than he would otherwise. This means that even though you do not spend anything when refinancing with this kind of a mortgage, you may end up paying much more than the initial closing costs for the entire term of the mortgage. This is because even a marginal difference in the interest rate can make a difference of thousands of dollars over the entire mortgage tenure.
No Cost Refinance Mortgage is a Short-Term Solution
As mentioned before the lender tries to recover the money that he pays for the closing costs of the loan by increasing the interest rate of the mortgage loan marginally. He’s expecting to recover his money from increased interest over the tenure of the mortgage and in fact in the end he is hoping to make much more than what he invested. This is why are no cost refinance mortgage is a more advisable solution for a short period that is if you are intending to stay in your house for 10 years or less. If you intend to stay in the house for the next 30 years then no cost refinance mortgage might fall to be much more expensive in the long run.
Varying Rates on No Cost Refinance Mortgage
Because it is up to the lender to increase the interest rate as he perceives the risks to be of paying the closing costs for the borrower, different borrowers might hike up the interest rate by a different much in. It is your best interest to shop around with several mortgage lenders to you can find the best rates that you’re ready to work with. Starting with your own mortgage lender may be a good place to begin. The lender that you have worked with so far may be more inclined to give you a better rate since you have a previous distance relationship with.