No Closing Cost Refinance Basics

By: Trace Richardson

No closing cost refinances loans are one of the best ways for you to save money when you refinance. Why pay thousands of dollars in closing costs if you don't have to? With a no cost / no points loan or a no closing cost mortgage, the broker will pay all closing costs! You keep the $2000 - $3000 you would usually pay in closing costs as they are paid by the broker. More importantly, because there are no costs paid in your refinance, we will continue to refinance your rate lower and lower as the market moves down with no costs. Every time rates go lower, you can lower your rate with no costs, even if rates only go down .25%.

The key to no cost loans is the "break even point". When you refinance with no costs your rate may be about .25% higher and this means that you will have a slightly higher payment, but this works to your advantage as shown below.

There are two components to closing costs:

1) The 3rd party closing costs (title insurance, escrow, appraisal, etc.)
2) Points you pay to buy down your rate.

If a borrower takes out a loan for $300,000 at 5.75% with $2750 in closing costs they will make a monthly payment of $1751 per month. Compare this to a borrower who takes out a $300,000 loan with NO Closing costs at 6.00% with a monthly payment of $1799. The person taking out the No Closing Cost Refinance will pay an extra $48 per month, but will have saved $2750 in closing costs. This means that unless the borrower is in the loan longer than the breakeven point of the Closing Costs - $2750 divided by the Monthly Savings - $48 which equals 57 (weeks) or 4.75 years than the No Cost Loan makes the most sense. If the borrower is going to be in the loan for longer than 4.75 years than paying closing costs and possibly points makes the most sense.

The added benefit is that if rates go down, a person in a No Cost Refinance can easily keep refinancing to a lower rate with no closing costs. There is no limit to how many times they can do this.

No cost loans are one of the most misunderstood mortgage loans that exist. Many mortgage brokers believe that they are a gimmick or scam, but the simple truth is that the math does not lie. Most homeowners are simply no in their loans long enough to justify closing costs. If you are unsure about whether a no closing cost or no cost refinance is right for you, simply have your mortgage professional run the numbers!

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