It is often possible to refinance and pay little or no closing costs,
at the cost of a slightly higher interest rate.
In a ‘no-cost’ loan, the lender pays all of the non-recurring closing costs. These costs are not rolled into the loan amount, but are credited back to you by the lender. However, these loans always have a higher interest rate and payment than a loan in which you pay the closing costs.
|Consider a no-cost loan if:||Avoid a no-cost loan if:|
When comparing two loans with the same loan amount, and where the only difference is that one is no-cost at a slightly higher interest rate, check the difference in monthly payments to find out how much the ‘no-cost’ loan is going to cost you on a monthly basis, and over the time you think you will have the loan. If the lender is willing to credit you $3,500 in closing costs, but your monthly payment is going to increase by $100, over ten years your $3,500 ‘saving’ is going to end up costing you $12,000 in the form of a higher mortgage payment.
Another option if you don’t want to pay the closing costs upfront is to finance those closing costs by increasing your loan amount rather than getting a no-cost loan with a higher interest rate. If you keep your loan for more than 3-5 years, this will be a less expensive option than a no-cost loan. Check with your lender.