Have you received those offers for no a “no cost refi”? Most of us have received these mortgage refinancing offers from Countrywide touting no fees or no out of pocket costs if you refinance your mortgage with them. But is it really no cost? Truly there has to be some cost. Well you know the saying, “nothing comes for free.”

With a no cost refi, the lender will pay some costs associated with the mortgage loan such as the appraisal fee, underwriting fee, loan processing fee, loan origination fee, title fees and so on. Fees that the lender will not cover will essentially be rolled into the new mortgage loan. So even though you won’t have to pay any costs out of your pocket now, you will be paying those extra fees over the life of the loan. Additionally, in return for paying those fees, the lender will not be offering you the best rate available. Remember, the lender must make up those fees in other areas of your loan.

What’s the overall affect of a no cost refi?

So your credit score and debt-to-income ratio qualify you and your spouse for a $400,000 mortgage. Without a no cost refi, the lender fees and title/closing fees on the good faith estimate may total $2,500 with a 1% origination fee, or $4,000. The total closing costs for this loan would equal $6,500. For this mortgage loan, your lender may offer you a 30-year 5.5% interest rate.

Now let’s take that same scenario, but throw in the no cost refi structure. The lender is offering to pay your lender fees and title/closing fees of $1,500 (leaving $1,000 to roll into the loan). They are also willing to pay the 1% origination of $4,000. The total closing costs for this loan would equal $0, but the interest rate your lender offers is 6.0% for 30-years.

Here’s the difference. On the first loan, your interest-only portion of the loan is $1,833 per month. The monthly interest-only portion of the no cost refi loan is $2,005. That is a difference of $172.00 per month.

Now is when you must make a decision. If you chose to pay the $6,500 in closing costs, you would break even on the refinancing costs in approximately 37 months (3 years) or $6,500/$172. If you plan to live in the house for more than 3 years, you may choose to pay the closing costs out of your own pocket and save $172 per month. However, if you don’t plan on staying in your home more than 3 years, a no cost refi may be the route for you.

A no cost refi is neither a good or bad option, it’s an option. Each loan scenario depends on situational circumstances. Your situation differs from your neighbor so make sure you are making the decision for your circumstance, not your neighbors.

photo courtesy of summersso