Refinancing a mortgage can be an effective way to get more favorable loan terms, but you’ll have to keep in mind that there are fees associated with this process. Recently, offers of smart refinances have cropped up, promising buyers an easy way to refinance their mortgages at a lower interest rate – without paying a penny.
But most mortgage professionals will tell you that refinancing a mortgage will come with some costs. So who do you believe? Let’s review the claims and see which one the facts support.
”Smart” Refinancing: The Illusion Mortgage Companies Present
One popular marketing tactic that mortgage companies have started using is creating the illusion of a zero-closing-cost mortgage. Called Smart Refinancing, the mortgage companies describe it as a way to avoid thousands of dollars in up-front closing costs.
In essence, these companies say that you can cash out, change your loan terms, or get a better rate – for free – without any negative consequences.
The Truth About Zero Closing Cost Refinances
In spite of what lenders may say, a zero closing cost refinance doesn’t give you the savings it would seem to provide.
Says Bob Walters, chief economist at Quicken Loans: “There are two ways that people achieve no-closing-cost mortgages. The mortgage company will flat-out waive (the closing costs), which doesn’t happen all that often. Or, they will present the rate (with) closing costs and if you don’t want to pay, you’ll take a slightly higher rate.”
In other words, if you take a zero closing cost refinance, you’re still paying the closing costs – but they’re rolled into your monthly rate instead of presented as an up-front fee. Either way, you’re still paying them.
Lenders will often present zero closing cost refinances as great programs with a variety of benefits, like the ability to tap into your home equity for large purchases or debt consolidation. But the truth of the matter is that you can do those things using a standard home equity loan – and for a lower interest rate than a zero closing cost refinance would provide.
Also keep in mind that over time, interest rates tend to build. If you intend to stay in your home for more than five years, a zero-closing-cost refinance will cost you much more in interest fees.
The mortgage market is full of offers and promises that may seem like once-in-a-lifetime opportunities, but if it sounds too good to be true, it’s not to be trusted. An experienced mortgage professional can help you to get an affordable mortgage that isn’t just mathematical trickery. Contact your local mortgage professional to find a reputable refinancing option for your home.