Costs of "No Cost" Refinancing |
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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 Chairman is resisting a bite of the bait to hike short-term interest rates this year. The endless flow of refinance applications has completely overwhelmed loan officers and brokers.
Low Interest Rates Spur Record Refinancing Most homeowners seizing the opportunity are switching from 30-year mortgages to 15-year mortgages 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 in half, resulting in the savings of thousands of dollars. Those not qualifying for 15-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 interest rates determine the extent of savings by homeowners refinancing at lower rates and changing to a 15-year plan. A 30-year mortgage for $150,000 with 8% interest works 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 at 5.5% interest, with monthly payments of about $1225, just $125 more per month over the 30-year mortgage and complete payment of mortgage in half the time with $175,000 saved in interest. This explains the reason for increasing numbers approaching lenders to refinance. The larger the mortgage amount and the higher the original interest rate, the more you save. Is No Cost Refinancing Really No Cost? Not necessarily. Taking the big picture into consideration, some no cost refinancing can actually cost quite a lot but it's not easily visible. No cost financing mostly requires you to pay 5/8 of a point more in interest than a full cost loan. There's reason enough for you to avail of this no-cost refinancing advantage if your current interest rate is far lower than the current no cost refinancing rates. This financing option is also worth considering in case you plan to be at home for 1-3 years. Even if you're unsure about how long you'll be in your home, it can still make 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 lets your roll refinancing costs into the loan, making it possible for you to refinance without a large upfront sum. 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. However per diem interest and escrow costs will be necessary, but your escrow costs will be credited at closing by your old lender. Conclusion There is no expectation for a reversal of low rates in the near future, which means the number of homeowners refinancing will continue to rise. This bodes well for lending institutions and homeowners alike. |
