Closing costs are typically part of taking out a mortgage or refinancing a current mortgage. The exact costs vary from state to state and area to area. For example, in 2013, Georgia closing costs were the 12th highest in the country, according to Bankrate. If you are refinancing your home to take advantage of still-low rates, you have a few options. One is to pay the traditional closing costs up front. The other is to explore no cost loans to see if they can save you money in the long run.
What “no cost” means
It’s important to understand that no cost loans don’t really mean “no cost.” Everyone involved in the mortgage process needs to earn money somehow, after all. What a no cost loan actually means for you is that you pay the closing costs over the life of the loan instead. While some lenders tack the closing costs onto the mortgage principal, others, such as BrightPath, adjust the interest rate on the loan to make up for the credit the company gives you to cover the closing costs. For example, instead of paying 4 percent interest with $4,000 in closing costs, you might pay 4.25 percent interest and $0 closing costs.
Who it works for
No cost loans aren’t for everyone, but they can be beneficial to people who move a lot or who don’t plan on staying in their current home for very long. For example, suppose the interest rate on your current mortgage is 7 percent, and you want to refinance to take advantage of the lower rates still available. You also plan on moving out of your home within a year or two. You might be hesitant to refinance if it means having to paying thousands of dollars out of your pocket in closing costs. If you take out a no cost loan with a slightly higher rate that’s still lower than your current rate, you’ll be able to save money on your mortgage until you decide to sell the home.
The most obvious benefit of a no cost loan is not having to pay out-of-pocket at closing. Another big benefit is that it gives you more flexibility when it comes to your mortgage. Since you aren’t paying out-of-pocket every time you refinance, you have the option of refinancing more often to get the ideal rate. The option also takes some of the worry out of the refinancing process because you don’t have to stress about refinancing at the exact right moment.
It pays to do the math when you’re considering a no cost loan or other type of refinance. A mortgage calculator can help you see if you’ll save money in the short term or in the long run and help you determine what type of loan is right for you.
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