No-Cost Mortgage Refinancing: Is It Worth It?

The only thing standing between you and the long term savings that mortgage refinancing offers are closing costs. Origination fees, lender’s fees and other expenses add up to a hefty out-of-pocket upfront cost that many homeowners simply can’t afford. But thanks to no-cost mortgage refinancing, you don’t have to spend money to save money.

The idea of no-cost mortgage refinancing seems too good to be true. Consumers who approach no-cost mortgage refinancing with a certain degree of trepidation are right to be suspicious - the mortgage market is rife with predatory lenders and unscrupulous mortgage brokers. But a no-cost mortgage refinancing isn’t an out and out free lunch. Rather, it’s a compromise between you and your mortgage lender that makes a refinancing or remortgage more affordable. Read on to find out how.

How No-Cost Mortgage Refinancing Works

Mortgage lenders vary in what they mean by no-cost mortgage refinancing, but typically, it means one of two things:

Your closing costs and lenders fees are waived in exchange for higher interest rates.
Or…
Your closing cost and lenders fees are rolled into your mortgage and added onto your principle.
In this way, a no-cost mortgage refinancing is anything but free. It would be more accurately described as a “no upfront cost refinance.”

Will a No-Cost Refinance Save You Money?

The answer to that question, as is with most questions about home loans and mortgages, is “it depends.” A no-cost refinance that waives your closing costs in exchange for 0.25 percent increase in your interest rate may not seem like a lot, but over 30 years, that fraction of a percent can add up to thousands of dollars (i.e. far more than you would’ve paid if you paid the loan fees in the beginning). With a no-cost refinance that rolls your costs into the principle, the trade-off is similar. Your principle will be higher, thus you’ll accrue more interest, your monthly payment will be higher and it’ll take longer to pay off your mortgage.

The above examples both presume that you stick with your no-cost refinanced mortgage for the long haul. The equation is different if you plan on refinancing or selling your home in the next three to five years. A no-cost refinance is far more economical if you only pay the premium for a few years. For example, the above-mentioned 0.25 percent won’t come anywhere near accumulating an extra $4,000 to $6,000 in five years (presuming that your refinancing at a time when interest rates are lower). In theory, you could get a no-cost refinance to get a lower interest rate and then refinance again (perhaps by paying the lender’s fees this time) to remove the premium before you start to break even.

Of course, mortgage lenders recognize the risk of a borrower doing just this, and some may levy prepayment penalties for no-cost refinances. Such penalties can negate the benefits of refinancing out of a no-cost refinanced mortgage.

Conclusion

Bottom-line: The potential benefits of a no-cost refinancing are dependent on good timing and planning. For some borrowers, it may actually be more worthwhile to put off refinancing until they can afford the lender’s fees and closing costs. For others, a no-cost refinancing can help them lock in low interest rates without incurring any out-of-pocket expenses.

Take time to run the numbers through our mortgage calculator and see what makes financial sense for you.

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