Should I Get a No-Cost Refinance?By
When you refinance a home there are many fees that you incur that must be paid including closing costs, courier fees, and recording fees among other things. It is estimated that $3,800 is the average closing costs for a refinance loan in 2011. Even though you are refinancing the loan for your house the fees must be paid out of pocket. However, there are a few loan types that pass those costs to other people and that include the no-cost refinance. With this loan type, the bank pays the fees associated with refinancing allowing you to keep more money in your pocket to spend on other things.
However, the bank does not give this money away for free. Typically the bank will charge a higher interest rate on no cost refinancing to recoup the money they paid for the closing costs. Exactly how much higher is the interest rate on the no cost mortgage? This could be anything from .25 to .375 cost to the closing costs or .125 or .25 is factored to the interest rate to compensate for the lender paying your closing costs. Although it may seem like a small percentage point it can translate into several hundred dollars on a $200,000 or $300,000 loan.
One of the main benefits of the no cost mortgage is the fact that the money is not coming out of your pocket. This is great for people who are strapped for cash but want to take advantage of low interest rates. If you could potentially lower your interest rate at least 2%, you would still come out ahead every month when it comes time to cut the mortgage check. This type of loan is also good for people that refinance their home frequently for investment purposes. In this instance a no cost refinance makes sense because that is money you don’t have waste every 5, 10, or 15 years you decide to refinance.
Doing a no cost refinance allows you to get more money out of your home. This is particularly beneficial if you are tapping into the equity of your home so you can pay off debts with higher interest rates or remodel your home. That extra $3,800 can be used to pay off credit cards, auto loans, or to make needed repairs that increase the value of your home. Make sure you shop around and compare interest rates of different banks to ensure you are getting the best interest for your investment.
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