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Many people are attracted to the “no cost” refinancing promotions and close deals on these products without considering whether they really come at no cost. Truth is that the closing costs and any other fees are transferred to the loan by a slight increase on the interest rate. But sometimes, lenders abuse this system and inflate the costs resulting in a significantly higher interest rate.
With mortgage rates on a steady fall, homeowners are increasingly refinancing current mortgages. The reason behind the declining mortgage rates is said to be the belief that the Federal Reserve is resisting to hike short-term interest rates this year. The endless flow of refinance applications has completely overwhelmed loan officers and brokers.
Low Rates Boost Refinancing
With refinancing such a rage, it makes you wonder the kind of savings homeowners are managing and the appeal of refinancing in the current situation. Most homeowners seizing the opportunity are switching from thirty-year mortgage to fifteen year mortgage and saving tens of thousands of dollars over the loan duration. Many applicants are surprised to learn that there is no drastic increase in payment, yet the payoff is cut to half while saving thousands of dollars. Those not qualifying for fifteen year mortgages are still refinancing at lower interest rates, choosing to use the bi-weekly payment facility to pay off loans early but still save thousands in interest.
The mortgage amount and the rates of interest determine the extent of savings by homeowners refinancing at lower rates and changing to 15-year plan. A 30-year mortgage for $150,000 with 8 percent interest rate will work out to monthly payments of around $1100 per month and in the course of the loan period the payments add up to almost $250,000 in interest. The same homeowner can take the same mortgage amount over a 15 year mortgage period, refinancing it at 5.5 percent interest rate, with monthly payment of about $1225, just $125 more per month over the thirty year mortgage and complete payment of mortgage in half the time with $175,000 saved in interests. This explains the reason for the increasing number of people approaching lenders for refinancing homes. The larger the mortgage amount and higher the original interest rate, the higher the amount that is saved.
No Cost Has Costs
Taking the big picture into consideration, some no cost refinancing can actually cost quite a lot but the costs are not easily visible. No cost financing mostly requires you to pay up to 5/8 a point more in interest than with a full cost loan. There’s no reason for you to apply for these no-cost refinancing advantages if your current interest rate is far lower than the current no cost refinancing rates. This financing option is worth considering in case you plan to be at home only for a period of one to three years.
But if unsure about how long you are going to be home, it still makes sense to go for a no cost loan. If you end up staying home for a long period, you can refinance at a later date. Borrowers contemplating no cost refinancing due to inability to afford refinancing costs, need to try harder. Often refinancing enables rolling costs of refinancing into the loan, making it possible for you to refinance without requiring a large sum of money up front.
But if you decide on no cost refinancing, ensure there are no hidden costs in it. A no cost loan does not require lender fees or settlements, which the lender pays for without affecting the cost of your loan. Nevertheless, there are some lenders that transfer the costs to the borrower by charging higher interest rates. So, make sure to compare different offers before closing any deal.
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