Owning a home is a crucial part of building generational wealth and finding financial freedom, but deciding when to make the move into homeownership is never an easy decision. That decision is especially hard today with home prices and mortgage rates at record highs.
Buying a home now would mean a housing payment that is likely much higher than you would like. But waiting until rates drop will put you in the crosshairs of more competition, higher home prices, and less ability to negotiate on your purchase.
This is where the no-cost refinance comes in. While mortgage rates are high, many lenders are offering homebuyers the option to buy now and refinance for free later. This gives you the ability to jump into homeownership now, immediately benefit from appreciation, ensure your housing payment never increases, and eliminate the gamble of hoping that home prices and rates will fall at the same time (spoiler alert: they never do.)
A recession is inevitable now, despite the fact that government stimulus has held it off for much longer than expected. When it comes, rates will drop and allow those who bought at higher rates to refinance into much lower ones – usually at no cost.
Understanding Refinance Closing Costs
Closing costs are the dollar amount it takes to get a mortgage done. There’s an appraiser, underwriters, title companies, recording fees, credit reports, transfer taxes – you get the point. There are a lot of parties involved in writing a mortgage, and everyone needs to get paid. This is true whether you’re buying a new home or refinancing an existing mortgage.
Typically, there are three different sets of costs or fees associated with refinancing a mortgage:
- Lender fees are the costs associated with taking your loan from application to closing. While these kinds of fees typically include an application fee, origination fee, processing fee, and an underwriting fee, the full list of what you pay will vary depending on the lender you choose.
- Title fees are the third-party costs associated with the sale and transfer of the property. You might also hear these called escrow fees. The amount and type of title fees you pay will vary depending on the state and property type, but typically include the costs associated with title insurance, attorney fees, settlement fees, recording fees, etc.
- Prepaids are the upfront payments that need to be made to cover certain expenses in advance. Prepaids commonly include monthly homeownership expenses like homeowners’ insurance premiums, property taxes, and any mortgage interest that accrues on the loan from the closing date through the end of the month.
What is a No-Cost Refinance?
When a lender advertises a no-cost refinance, they are saying they will offer you a credit to offset the lender, title, and other third-party fees. This is usually done in exchange for a slightly higher interest rate than you would receive if you chose a traditional refinance and paid all your closing costs out of pocket.
If this is the case, the only costs you will be responsible for are the prepaids. These costs can vary widely depending on the location of your property (for property taxes) and when you close your loan (for prepaid interest). You can either pay these upfront costs when you close, but often your lender can roll them into your new loan amount, so you truly do not have to pay anything out of pocket.
This might make you question the “no-cost” part of your refinance, but prepaids are not really considered costs. Even if you did not refinance, you would still be paying property taxes, homeowner’s insurance, and mortgage interest. Getting a new loan just means you pay a few months’ worth of these costs upfront.
Keep in mind you will also likely get a refund from your previous mortgage. When you refinance, your original loan is completely paid off, and any balance you had left in that escrow account will be refunded to you in the form of a check issued by your old mortgage servicer.
When Should You Consider a No-Cost Refinance?
In a market where rates are expected to go down, no-cost refinance is one of the savviest tools you can use to save money both short and long term.
If you bought a home today, it’s very likely that you will have multiple opportunities to refinance your loan and capture savings before rates settle and stop decreasing.
If you refinance and pay closings costs, then refinance again as rates continue to drop, it’s likely you won’t have recouped all the closing costs from the initial refinance.
Let’s say you bought a home today, and six months from now you can refinance and save $100 on your monthly payment. Let’s also say the closing costs for this new loan would be $8,000.
If you paid that $8,000, you would have to keep your loan for 80 months to breakeven. If you refinance again any time before that, you will have lost money.
A no-cost refinance eliminates this risk, even if the rate for the no-cost refinance is a little higher. Let’s say the monthly savings are only $50. With $0 closing costs, even if you refinance again in one year, you will have saved $600.
The Bottom Line
In today’s market where interest rates are expected to fall, a no-cost refinance can be a simple and risk-free way for homeowners to save money.
While rate is certainly an important consideration, along with the term of your loan, a no-cost refinance can eliminate the risk of paying double or even triple closing costs in a market where rates decline substantially.
Nobody knows where the bottom of the market is, or what the lowest rate will be, but if the savings make sense and you can get those savings without costs, a no-cost refinance can be a great way to improve your loan and save you money.
At NEO Home Loans, our goal is to make sure you know exactly the rate at which it makes sense to do a no-cost refinance. Our mortgage advisors constantly monitor your loan relative to the current market conditions, and whenever there is enough of a change we will reach out to you and refinance your loan at no-cost so you can immediately capture savings.