Money Management Tips and Finance Basics

A Guide to No-Cost Refinancing

Should you refinace your home loan? Get the facts on no-cost refinancing before signing on the dotted line.

By Vera Gibbons
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Mortgage rates are at historic lows. So if you haven’t already refinanced your home loan, it might be a good time to make the move—especially if you have at least 20 percent equity in your home, are planning to stay put for at least three more years, and can lower your interest rate by at least 0.5 percent, says Keith Gumbinger, the vice president of Hsh.com, a consumer-loan information website.

Currently, some lenders are promoting “no-cost refinance” mortgages, in which up-front fees or out-of-pocket expenses are waived. It certainly sounds appealing. So should you go for it?

The pros: You don’t have to shell out for closing costs, which can be substantial. They generally range from 1.5 to 2 percent of your loan balance (meaning it would cost $3,000 to $4,000 to close on a $200,000 mortgage). The application, title search, and credit check or appraisal are all complimentary.

The cons: Nothing is truly free. “You will pay one way or another,” says Greg McBride, the senior analyst at Bankrate.com, a personal-finance website. You may be hit with a higher interest rate (anywhere from 0.125 to 0.5 percent more) than you would get if you paid closing costs, or you may be assessed a higher loan balance if the fees are added to the principal.

The bottom line: Sign on the dotted line, but only if you don’t have the money available to cover the costs. If you can afford to do so, paying the fees yourself is the better option. A higher interest rate will ding you more over the long haul, says Gumbinger. If you’re still not sure which type of refi to choose, crunch the numbers at hsh.com/refinance-calculator to see a side-by-side comparison.

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