Zero Cost Refinance - Too Good to be True?

Is there such thing as a zero cost refinance? Many homeowners are looking to take advantage of historically low interest rates as a result of the economic recession. Mortgage rates are at all time lows, making it a perfect time to refinance an existing mortgage.

One of the main drawbacks to refinancing are the associated closing costs that will be charged as a result of doing business with a lender. Refinance closing costs could include origination fees, appraisal fees, hazard insurance, title fees, and much more. Depending on the amount that is financed, these closing costs could run several thousand dollars.

Because of the closing cost charges tied to a new mortgage, it makes sense for homeowners to start searching for a zero cost refinance to get the best of both worlds. Here are a few things that you can expect with this type of loan.

Expect to Pay a Higher Rate

Most of the time, a lender will offer a higher mortgage rate in return for covering all closing costs. Homeowners must recognize the benefits of the lender covering the closing costs versus paying a higher rate for the term of the loan. Most of the time, the homeowner will be wise to pay the closing costs upfront to avoid paying a higher rate for a 15 year or 30 year mortgage.

Escrow and Prepaid Insurance

While a lender may agree to cover closing costs associated with a refinance, there are a few they probably will not. If you currently have or plan to pay your taxes or homeowners insurance via an Escrow, then you will be responsible for covering any associated costs.

Another cost that the lender will probably not cover is any prepaid insurance for the new loan. Since this cost is almost avoidable, you can try and reduce it by closing at the end of the month as opposed to the beginning.

These so-called costs are to cover any minimum balances required by the bank and are not necessarily expenses, but money you will need to pay at closing.

Selling Your Home Soon?

Are you planning to sell your home in the next few years? A zero cost refinance may be a viable option to lower your monthly mortgage payments now while paying very little at closing. Trading off a slightly higher interest rate while paying very little at closing could help put some money in your pocket each month. This could help you to save a little cash while you wait to sell your home.

If you are not planning on selling your home soon, a zero cost refinance could still be the right fit for you. It really depends on your current situation and long term financial goals.

Yes, there are such things as a zero cost refinance. However, don’t let the wording confuse you. There is a good chance that you still will need to cover some expenses or pre-payments at closing such as prepaying interest. Homeowners can also expect to pay a higher mortgage rate than those borrowers who choose to pay their own closing costs.

Have you had any success with a zero cost refinance?