A “no-cost” refinance simply means that you’re not using any cash reserves to pay the closing costs upfront but in other ways. Mortgage interest rates are the lowest in 50 years, according to the Wall Street Journal and we can now offer you refinancing with almost nothing out of pocket. Although interest rates are at historic lows, refinancing only makes sense if you are aware of all that is involved in your refinancing process.
Below are the important things to note when considering this route on the path to achieve your financial goals:
The truth is you will still have to pay closing costs
The expression “there ain’t no such thing as free lunch” also applies to “no-cost” refinancing. When refinancing, it’s important to note that the national average closing costs is not indicative of what your loan will cost. Rather it is contingent on the size of the new loan you’ll take out, and it could range from 2 percent to 6 percent of the outstanding principal. Instead of paying for the upfront costs upon closing on a new loan, your lender could give you the option to either increase your interest rate or roll costs into your principal in order to cover the closing fees. Since a refinancing transaction involves other parties with their own fees, your lender will initially shoulder your closing costs and help you take advantage of the historically low interest rates. It is very appealing as many need to use funds for other important things such as education, remodeling, or other investments. Many find that maintaining cash reserves has become extremely important during the pandemic.
If you decide to fold closing costs into your loan and anticipate that you may be refinancing in a few years, please ask one of our Loan Advisors about prepayment penalties, and if it would apply to you.
You Should Have Sufficient Home Equity
Equity is the current market value of your home that you own. Having enough home equity is important when refinancing as it ensures your lender will be able to secure your new loan. Home equity typically determines how much you are able to borrow, as well as the interest rate your lender will charge you. Most lenders prefer that the current appraised value of your home is at least 20 percent or more. This becomes a larger factor if you are looking to cash-out your equity and skip closing costs. Although you may be able to refinance with less than 20 percent equity, it may affect your monthly payments and insurance rates. Refinancing may not make sense if you only have a few years left to complete your mortgage as it will reset your amortization.
BUT, if you think you’ve built enough equity after a few years with your current mortgage loan, this could be the best time to contact your loan advisor for a mortgage checkup.
Find Out if it Makes Sense to Pay Closing Costs
Paying closing costs is worth considering if you are able to cover the upfront refinancing costs without sacrificing emergency funds. Paying closing costs upfront will ultimately help you get a competitive interest rate for those who anticipate not selling the home.
“No-cost” refinancing is advisable though, if there is the possibility of selling or refinance again within three to five years and you aren’t able to cover the upfront closing costs. This will allow you to take advantage of a much better rate or cash out your home equity.
Discuss Your Refinancing Options with an RPM Mortgage Loan Advisor
Consider a “no-cost” refinance if you want to take advantage of the historic low mortgage interest rates and you want to use your finances for other important matters. Since you’ll still pay closing costs, it’s important that you know if you’ll benefit from the process.
Call, text, or email us today to better understand your refinancing options!