Sometimes smoke and mirrors are fun and sometimes they’re not. They are fun at a circus; they are not fun when doing a mortgage refinance.
Some of the info about refinancing can be misleading.
This can lead to people falling into a financial trap that even Indiana Jones couldn’t get out of. Arming yourself with knowledge is a great way to avoid getting in over your head.
Fees fees fees
Some of the fees that are associated with closing a mortgage refinance include title escrow fees, appraisal fees, underwriting fees, and processing fees, to name a few. The truth is, you are going to pay these fees one way or another. Sometimes lenders can roll your expenses up into a nifty little package and add them to your loan.
But how are they added?
Not paying fees upfront normally means paying your loan at a higher interest rate. Believe it or not, this may not be so bad. If you are in dire need of a mortgage refinance, and have no cash, this can definitely help.
Let’s say you’ve got a loan balance of $500,000 and a refinance offer at a 6% interest rate. With 1.5% of your loan amount in closing costs, you’d have to pay $7,500 to seal the deal. But say instead of paying out of pocket, you wanted to waive the closing costs in exchange for an extra .5% interest, putting the loan at 6.5%.
If paying only interest (easier to calculate) on the loan each month, you’d have to pay $200 a month more than if closing costs were paid out of pocket. After a few years, this extra cost can greatly exceed the initial $7,500 due at closing.
So when is it a good deal?
If you intend to stay in your home for a long period of time, you are better off paying up front.
If you intend to move, upgrade to a bigger house soon, or like to refinance often, then getting a loan with no out of pocket closing costs may be an OK deal.