Justin Perry's Mortgage Blog

So you want to refinance your mortgage home loan to get a lower interest rate but you want to make sure you are getting the best deal. You might have heard a friend or co-worker mention that they were able to refinance with no closing costs. To some, the initial reaction is that it seems too good to be true. Most of us learned at a young age that nothing in life is “free.” So how of all things can you get a mortgage without paying any closing costs?

It’s actually very simple. There are closing costs (i.e. an appraiser still needs to get paid, the attorney still needs to get paid, etc). On no closing cost loans, the bank or lender pays your closing costs for you. In return the borrower accepts a slightly higher interest rate (typically an 1/8 to a ¼ point higher). That higher rate is what allows the lender or bank to pay the closing costs. For example let’s say closing costs total $2,000. If you wanted to get the absolute best no points rate and were willing to pay closing costs you might get say 3.75% (APR 3.792%). But at 3.875% the lender or bank might make an additional $2,000 on your loan which they give back to you in the form of paying all your closing costs.

One common argument is that “why would I want to pay a higher interest rate for 30 years just so I can save a few $$ today?” Well a counter to that would be that the average American keeps their mortgage for about 3-4 years. So it’s very unlikely that someone will actually have their mortgage for the full 30 year term. Ask yourself how long you have had your current mortgage loan.

Another reason no closing cost refinances are so popular is because we don’t know where rates will be tomorrow. I’ll give you a good example of this. One client of mine refinanced last year and was dead set on wanting to pay closing costs and getting the lowest mortgage rate possible. Since this client knew exactly what he wanted and fully understood the trade-offs of paying or not paying closing costs, we did his mortgage loan as such. That client paid about $2,300 in closing costs on his 15 year fixed rate mortgage. Well two months after he closed mortgage rates went down by half a point. We were able to refinance his mortgage and lower his interest rate by half a point with no closing costs. But he was extremely frustrated that he had just paid $2,300 in closing costs just two months earlier.

Everyone’s situation is different. Just make sure you understand the pros and cons of paying or not paying closing costs when you refinance your mortgage. If you have any questions about this or any other mortgage related topics please call or email me anytime.