The Problem with a No Fee Refinance

No matter what your mortgage lender tells you, there is no such thing as a no fee refinance. Even if you are not required to bring any money to closing, there will always be some closing costs that must be paid. The difference is how you end up paying to close on the new loan and what your lender may not be telling you.

Closing costs can either be paid upfront where you bring money to the table, or rolled back into your loan. When a lender is offering a no fee refinance, it more than likely means they are simply rolling your closing costs back into the loan. This means that you will end up paying interest on these costs for the life of your loan, and may not even realize it.

While it is usually a smarter option to pay all closing costs upfront on a refinance to avoid paying interest, there are some cases when it is acceptable. Depending on your current mortgage details (i.e. existing principal, loan terms, and interest rate) and financial standing, rolling your fees back into the loan may make sense. The important thing to remember is that you are aware of this and are comfortable with the decision.

Banks and lenders have many names for these types of loans, but ultimately they claim the homeowner is not responsible for paying any closing costs. A refinance could include origination fees, title fees, attorney fees, and many more different costs. Mortgage or refinance closings can run a couple thousand dollars in costs, which is how the bank ultimately makes its money.

In some cases, there are fees that a lender may decide to waive or cover themselves, which can lower the overall costs but not completely eliminate them. Fees like prepaid interest on the new loan, escrow fees, homeowners insurance, etc. will never be covered by the lender. As a homeowner looking to refinance, you can either decide to pay these expenses upfront or decide to roll them back into the new loan.

The bottom line is that while your lender may promise you a no fee refinance, they just don't exist. This is not to say that refinancing is still not a good financial move that a homeowner can make, they just need to fully understand the details of the new loan.

Don't get discouraged over the truth of a no fee refinance. Even though you may need to pay a couple thousand upfront in closing costs (or roll it into the new loan), refinancing your home can be a wise financial move. With interest rates at historic lows, an average homeowner could cut their monthly bill by over $100.

As long as the homeowner decides to stay in the home long enough to recoup any closing costs, refinancing your mortgage could reap many benefits over the life of a home loan. The most important thing to remember is to fully understand the terms of your new loan (not to mention your existing one) and know exactly how the costs are going to be paid.

Have you encountered any problems with a no fee refinance?