Low-Cost and No-Cost Refinancing: How It Works?

no-cost refinancingConsidering how much lower mortgage rates are as compared to the same time last year, or right after the “summer spike” of 2013, it really makes a lot of sense to refinance. That way, you can reduce the amount of your monthly payments, or change the type of product you’re currently on, say, shift from a fixed mortgage to an adjustable one. If you’re in the process of a divorce, refinancing could get your soon-to-be ex-partner’s name off the mortgage, and you can also refinance and draw from your equity if you’re looking to upgrade your home.

However, it’s always best to refinance without having to pay exorbitant fees, or better yet, to go for a no-cost refinance. But how can you do that and get a lower mortgage interest rate without having to break the bank due to refinancing fees?

The first strategy you can employ is to apply for a refinance with your current lender. As your bank would most likely want to keep your business and retain you as a customer, they are also likely to offer a refinance that won’t come with pricey closing costs. In fact, the bank may go ahead and waive some of the closing costs, especially if you’ve been a long-time customer, or if you’ve been receiving quotes from competing lenders. It’s a dog-eat-dog world out there in the mortgage lending space, and it would behoove your bank to keep you in the fold and prevent you from refinancing elsewhere.

Truth be told, there really is no such thing as no-fee refinancing. However, what you can do to avoid paying fees, or make it appear like you’re not paying fees, is to bake in the closing costs into your mortgage balance. For example, if the loan you’re refinancing is valued at $250,000 and you have closing costs of $10,000, you can ask your lender to bake the costs in, making your balance $260,000. That way, you don’t have to pay closing costs right away on your dime.

Alternately, you can also ask your bank to waive closing costs or have them pay the costs for you by having your mortgage rate increased. An example would be paying a rate that’s about 40 to 50 basis points higher (or 0.40 or 0.50 percent higher, in layman’s terms), in exchange for the bank paying all closing fees.

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