Refinancing your mortgage can reduce your monthly payment and interest rate. But with the closing costs associated with refinancing your mortgage, is it worth it? We have heard about new “no closing cost refinance” options available.. But what are the hidden costs? Could a no cost mortgage refi cost you tens of thousands of dollars over the life of the loan? Let’s dive into the numbers to see…

The average closing costs to refinance a mortgage loan in 2018 is 1.5%. This figure will vary based on different factors such as the loan type and your credit score. On a $200,000 mortgage the average closing costs will come out to 1.5%, or $3,000. If you are refinancing into a 30 year term this means you will need to see a decrease by about $90 a month to break even. The good news is that most lenders will allow you to roll the closing costs into the loan. This way you do not have to pay any cash up-front.

How No Closing Cost Refinance Loan Work

A no closing cost refinance seems a little too good to be true. In fact, it may be…The truth is you’re going to end up paying something to refinance your mortgage. Whether it’s in the form of closing costs, original fees, or a higher rate. A no closing cost refinance will usually come with a higher interest rate to make up for the lost costs. That rate could be as much as a half a percent higher than if you were to pay closing costs. A half a percentage point over the course of a loan will cost you tens of thousands of dollars over the life of the loan making it more expensive in the long haul. Advantages of a No Closing Cost Refinance No additional lender fees Mortgage balance won’t increase Pay nothing out-of-pocket Disadvantages of a No Closing Cost Refinance Higher interest rates Is more expensive over the life of the loan Not available from all lenders Get the Best Refinance Rates When you’re refinancing your mortgage it’s critical to compare refinance offers from multiple lenders. If you are being offered a no cost refinance. It makes perfect sense to still shop around, you may find a better deal from a lender that does charge closing costs. Remember these costs can usually be rolled into the loan so you do not have to come out of pocket for them.

Types of Refinance Programs

• HARP – The Obama Administration created the Home Affordable Refinance Program in 2009 to help homeowners whose home values decreased because of the housing market crash. HARP allows homeowners who are underwater on their mortgage to refinance their loan to a lower rate.
• Rate and Term Refinance – This is a more traditional refinance option available for conventional mortgages. This refinance program allows borrowers to refinance their mortgage into a new 15 year, 30 year, or adjustable rate mortgage.
• Streamline Refinance – A streamline refinance is available to borrowers who have a Government backed mortgage loan. FHA, VA, 203k, and USDA streamline refinances are much easier and require less paperwork than traditional refinance loans. In some cases lenders do not require a credit check or income verification for a streamline refinance.
• Home Equity Loans – Home equity and HELOC loans use the equity as collateral for a second mortgage on the property. Homeowners are able to get cash by giving up some of their home equity up to a 80% LTV. Refinance Loan Terms Refinancing from a 30 year fixed rate into a 15 year rate mortgage is one of the more popular options people choose. 15 year refinance rates are as much as a full percentage point lower than 30 year rates. Not only will you pay off your loan faster, you will pay a lot less interest over the life of the mortgage.
• Adjustable rate mortgage – Refinancing out of a mortgage with an adjustable rate into a fixed rate makes a ton of sense. Adjustable rate mortgages often have rates that will increase on an annual basis after a short term with a low initial rate.

What Makes Up Closing Costs on a Refinance Loan

1. Appraisal Many lender will require that a new home appraisal be performed on the property being refinanced to determine the loan to value ratio. The average home appraisal is between $300-$500 and is usually required to be paid up-front.
2. Application Fee The application fee is charged by the new lender for closing out your existing loan and opening a new mortgage. The average application fee cost is between $250-$400.
3. Processing Fee  This is a fee paid to the loan processor handling the loan documents typically cost $1,000 – $1,500.
4. Loan Origination The loan origination fee is a fee charged by a lender for originating the loan. This fee is usually what the loan officer is paid for completing the refinance for you. The typically loan origination fee is about 1% of the loan amount. For example: If you have a $200,000 mortgage the loan origination fee will be around $2,000, or 1% of the refinance amount.
5. Credit Report Lenders can charged to pull your credit report and they pass this fee along to you. The typically fee is $25-$35.
6. Document preparation fee Some mortgage companies may charge fees for preparing and mailing documents. These fees can range from $100 to as high as $400 – $500.
7. Title insurance The original title search will usually not be sufficient when you are refinancing. The lender will ensure the property is free of any liens and that you are the legal owner. The title search and insurance combined can be between a couple hundred dollars to $500.

Bottom Line… A no closing cost refinance may sound like a great thing. But, don’t fall for the tricky advertising. There’s always a cost to pay for a loan. Whether in the form of closing costs, or increased mortgage rates, the mortgage company will make their money.