If you're new here, you might want to learn what this site is about.
Please consider signing up to receive free updates via RSS or e-mail.

Adjust Text Size

Beware the “No-Cost” Mortgage Refinance

Written by Nickel - 58 Comments

As a followup to last week’s post about finding the best mortgage rates, I just wanted to remind you that there is no such thing as a free lunch. I mention this because those of you that are in the market for a new mortgage are likely to be confronted by offers for a “no-cost” refinance. While this isn’t necessarily a bad thing, it’s important to know what you’re getting into.

What’s a “no-cost” mortgage refinance?

A “no-cost” refinance is one in which the lender or broker covers the closing costs on your new mortgage. Depending on where you live, you can expect to pay 2-3% of the loan amount when closing a typical mortgage, so this is a great deal. Right? Well…

The reason I keep putting the term “no-cost” in quotes is because there actually is a cost — you just don’t typically see it. In other words, the lender doesn’t eliminate the costs, they simply convert them into another form. In most cases, this means that you’ll wind up paying a higher interest rate.

It works like this… Just as you can buy points to reduce your mortgage rate, you can increase your mortgage rate in return for negative points. Each point is equal to 1% of the loan amount. By accepting a higher than market rate on your loan, you can generate cash back that lender can use to cover the closing costs.

Clearly, this approach is most beneficial to those with a short time horizon, as they’ll enjoy the upfront cost savings without having to live with that higher rate for very long. If you decide that the “no-cost” option is best for you, be sure to get a full rundown of the costs that are covered so you can make a meaningful comparison across lenders — not everyone covers all the same things.

“No-cash” is not the same as “no-cost”

Perhaps the biggest mistake that you can make when shopping for a “no-cost” refinance is to wind up with a “no-cash” deal instead. While the names sound very similar, these are very, very different products. With a “no-cash” refinance, the closing costs are rolled into the balance of the new loan.

Because there aren’t any negative points involved with a “no-cash” refinance, the rate will likely appear more competitive on a “no-cost” refinance. Unfortunately, you’ll wind up paying the fees yourself over time plus interest.

Published on May 27th, 2009 - 58 Comments
Filed under: Debt Reduction, Mortgages, Real Estate

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

Related articles...

» Time to Refinance Your Mortgage?
» How to Decide When to Refinance Your Mortgage
» Calculating Your Mortgage Refinance Payback Period
» Refinance and Overpay to Pay Off Your Mortgage Faster
» Mortgage Refinance Complete
» Deciding When to Refinance Your Mortgage
» Mortgage Refinance Rates Continue to Fall
» More Thoughts About Refinancing Our Mortgage

Was this article useful? Please sign up to receive our content via e-mail:

You will receive only the daily updates, and can unsubscribe at anytime.

58 Responses to “Beware the “No-Cost” Mortgage Refinance”

Pages: [1] 2 » Show All

  1. 1
    DDFD at DivorcedDadFrugalDad Says:

    Universial truth: There is always a “catch” and a “cost.”

    Nice post!

  2. 2
    Jared Says:

    Tanstaafl is a great principle to always keep in the back of your mind, but in today’s lending market “no-cost” refinancing may be a great option. I say this because in most cases rates today are likely to be much lower than what some one already has. Now, if we are talking about a “normal” market everything you said is spot on.

  3. 3
    ckstevenson Says:

    A very basic example:

    I have a 30 year fixed with 29 years left at 5%, I get offered a “no cost” refi for let’s say 4.75% as a 30 year fixed.

    Why wouldn’t I take it?

  4. 4
    Kerri Says:

    Interested in any arguments for/against ckstevenson’s comment since I’m almost in that exact situation and I’ve considered a “no cost” loan myself…

  5. 5
    Nickel Says:

    ckstevenson & Kerri: In the example you give, there’s not much downside. Refinancing resets the clock on your mortgage, but if you’re less than a year in, that’s not a big problem. While this may be a good option, however, you have to ask yourself if this is the best option. If you plan to be in your house for the long haul, then you might be better of paying the closing costs yourself and getting an even lower rate.

    What really matters here is the breakeven point. If it will take too long to recover your costs with the lower rate, then the no-cost refinance is a great option. Otherwise, you should really think about biting the bullet and paying the costs yourself.

    Of course, the other thing to be sure of is that this is a true no-cost refinance, and not a no-cash refinance (some brokers play it fast and loose with the terminology, so be specific when asking questions).

    Bottom line: There’s nothing inherently wrong with a no-cost refinance as long as you understand what it’s all about and are sure that it’s the best option given your circumstances.

  6. 6
    Rob Says:

    I would think that these days your credit would have to be absolutly perfect to get a no cost re-fi.

    I am hearing brokers are swampped right now with re-fi’s lets hope this doesn’t lead to another housing problem

  7. 7
    Rosa Says:

    If you’re planning on paying off the mortgage (instead of using any monthly savings for something else) I think the total lifetime cost is more important than the break-even point.

  8. 8
    Chris Says:

    Rosa has the right idea and the original post mentioned this as well. Look at the total cost over the lifetime of the loan. Many loan offers tout saving money by lowering monthly payments but ignore the overall cost.

    In business I often have customers wanting to cut costs. In their mind this means a lower price or longer terms which is actually shifting costs, much like the no cost, nocash examples. Removing costs like home inspections, title searchs etc. is what you are trying to do. Home Equity loans though not lines of credit tend to be lower cost options. For a refi if you have already done title searchs and other things there is no reason to pay for them again.

  9. 9
    Danielle Says:

    For some fun reading about the “TANSTAAFL” principle, look it up on wikipedia!

  10. 10
    Gina Pogol Says:

    Well, duh. One can’t really expect people to work for free and companies to take on the risk of refinancing folks for no compensation. That’s not evil, that’s just commerce. As the author says, a no-cost refi is still a smart play if your new rate is lower than your old one; there is no break-even period so those unsure of their time-frame can still lower their rate and payments. If you know you’ll be there longer than of course you should probably buy your rate down. A great calculator from HSH.com shows the difference between all three ways of paying for a refinance and how they affect you. It’s called the Tri-refi calculator.

  11. 11
    Tanya Says:

    I recently refinanced a$720,000 loan from 5% to 4.25% 30 year fixed. There were absolutely no charges to refinance, the loan amount remained the same, and my monthly payments are reduced by $450 a month. And two weeks ago I received another no-cost refinance offer at 3.75% 30 year fixed, and I am already in the final stage of having the loan transferred to a different bank. Again, nothing was added to my loan, and I am reducing my monthly payments by $200.00 a month. It is possible in today’s market. One should still be cautios, of course. I was lucky to have worked with decent and honest brokers.

  12. 12
    Tanya Says:

    I recently refinanced a$720,000 loan from 5% to 4.25% 30 year fixed. There were absolutely no charges to refinance, the loan amount remained the same, and my monthly payments are reduced by $450 a month. And two weeks ago I received another no-cost refinance offer at 3.75% 30 year fixed, and I am already in the final stage of having the loan transferred to a different bank. Again, nothing was added to my loan, and I am reducing my monthly payments by $200.00 a month. It is possible in today’s market. One should still be cautios, of course. I was lucky to have worked with decent and honest brokers. Also, we purchased the house less than two years ago, so refinancing at 30 year loan again isn’t going to affect us. We also plan to live in this house for a very long time.

  13. 13
    JT Says:

    Tanya, who is your broker? I would like to do a no-cost refinancing on a condo I bought over a year ago. You reduced your monthly payments by $650? Wow! 0 points and 0 closing costs makes the duration of living in your current place irrelevant because if you decide to move a year or two later, you need not have to factor in the amount you paid in points and closing fees since you paid nothing.

  14. 14
    JC Says:

    I have 7 years left on a 15 year mortgage at 4.75%. Is it worth my while to refinance? I don’t want to extend the term; I would want to make the same payment as I do now and put the extra towards principal, so the term would be the same as what I have left. The advantage would be paying less interest and also having flexibility in the event of income loss. My current loan is with a large bank that has been in the news for mortgage shenanigans. Can they be trusted to live up to a “no prepayment penalties” promise?

  15. 15
    bob Says:

    Jc, how about a 7/1 ARM?

  16. 16
    More details here Says:

    I was curious if you ever thought of changing the layout
    of your website? Its very well written; I love what youve got to say.
    But maybe you could a little more in the way of content so
    people could connect with it better. Youve got an awful lot of text for only having one or 2 images.

    Maybe you could space it out better?

  17. 17
    warranty coupon Says:

    Thanks a lot for sharing this with all folks you really know
    what you are speaking about! Bookmarked. Kindly also talk over with my
    website =). We may have a link trade contract between us

  18. 18
    hosting Says:

    Every year several new web hosting providers are created to profit from the exploding growth of website hosting, all striving to be the best
    in the business. The most attractive features of this plan are they come with:.
    Every website out there requires web hosting, and there are tons of companies out there competing for your business.

  19. 19
    ???? ?? Says:

    An additional hot fall novelty are bags that have top handles.
    New Americanized Posh Spruce (a/k/a Victoria Beckham) is
    also a big fan. Usually do not stroll into those parking good price for
    a use the e-cig. It is and as a result lousy and disillusioned so everyone can find.
    http://www.bar-s-ranch.com/userinfo.php?
    uid=12229

  20. 20
    None Of The New Medicare Plan F Programs To Be Affected By Obama-Care Says:

    I think what you posted was actually very logical.
    However, what about this? suppose you added a little information?

    I am not saying your content isn’t good, however what if you added a post title to possibly get a person’s attention?
    I mean Beware the ?No-Cost? Mortgage Refinance is kinda boring.
    You ought to look at Yahoo’s front page and note how they create article headlines to grab viewers interested. You might add a video or a pic or two to get readers excited about what you’ve written.
    In my opinion, it could bring your posts a little bit more interesting.

  21. 21
    juicing tips Says:

    I always emailed this weblog post page to all my associates, because if like to read it next my friends will too.

  22. 22
    None of the new medicare supplement plan f programs to be affected by Obama-care Says:

    Good write-up. I definitely appreciate this website.

    Keep writing!

  23. 23
    http://agi.se/ Says:

    I believe this is among the most significant information for me.
    And i’m satisfied reading your article. But should remark on few common issues, The site taste is wonderful, the articles is actually excellent : D. Excellent process, cheers

  24. 24
    premiosycertameneslapalma.org Says:

    Hi! I’ve been reading your blog for some time now and finally got the courage to go ahead and give you a shout out from Houston Tx! Just wanted to tell you keep up the great job!

  25. 25
    coupon codes Says:

    Hello, this weekend is good for me, because this occasion
    i am reading this wonderful educational article here
    at my residence.

  26. 26
    elleattv.com Says:

    Excellent blog here! Also your website loads up fast!
    What web host are you using? Can I am getting your affiliate link
    on your host? I desire my web site loaded up as
    fast as yours lol

  27. 27
    global warming Topics Says:

    I do agree with all the ideas you have presented on your post.
    They are really convincing and will certainly work. Nonetheless,
    the posts are very brief for starters. May just you please lengthen them a little from next time?
    Thank you for the post.

  28. 28
    Santa Fe Restaurants Says:

    And though most people want to stay in Pigna or Trevi,
    some of the other districts of Rome offer a different, and just as special, experience.

    Using your Smartphone, laptop, or tablet, you can go ahead and download the latest in software technology for
    the development of applications for restaurants.
    Even so, the final menu is well prepared by the caterer with the assessment of the client along with the number
    of guests who are supposed to attend the function. And with the number of restaurants that they have on their website, you are sure to find the perfect place to dine for that
    special night. I have a good amount of knowledge in starting a pizzeria
    because I have worked in many throughout my life, also my father has started one.

  29. 29
    bathroom remodel Says:

    Walls, roofs, and if you choose the right bathroom remodel under 500 Panel Installers, who possess required
    skills and adequate experience to handle the task.
    It’s even better than the 2013 model year CAFE standard of 34.

  30. 30
    brendajmeador.beep.com Says:

    To take full advantage of security 123 thermal plants remain competitive when oil costs $70 per barrel.
    The magnetic disruption that produces Security 123 flares
    occurs in the photosphere. An adsorption chiller
    is a device that converts heat into cooling via a thermal cycle
    applied to an absorber made from silica gel, for example.
    This first portion of the most common colors being clear and blue.
    They can be attached to a tracking system that determines the best angle is latitude plus 15 degrees.

  31. 31
    packing boxes Says:

    We could have held a garage sale for the past three weekends
    and still had Wiggles DVD s left over. One company that realised the potential for being green in the storage industry is Boomerang Box, a service that rents out moving house van for customers who are moving premises.
    Throw a boomerang in the correct manner and it will return
    to you, send out a boomerang box and eventually it’ll come back too!

  32. 32
    solar Says:

    You don’t need to worry that you’ll be tearing your
    whole roof to utilize solar energy. The first Solar charger we
    will briefly cover is the Nomad 7 M Solar Panel. The takeoff was historic, slow and steady as the
    world’s first 3 D-printed house, Sinterhab unveiled plans for a 3 D-printed space station that could be developed into wind farms. And there is no sunlight. The latitude is a measure of the angular distance in degrees above or below the equator.

  33. 33
    bitethehandsthatfeedyou.com Says:

    There are also several websites that promote the idea of a home
    based bathroom renovation edmonton energy business besides getting the whole business operation up and running by
    yourself.

  34. 34
    http://seniastout.typepad.com/blog/2013/07/building-a-solar-aboard.html Says:

    Solar energy can also help investors identify compelling
    economic opportunities that are not always obvious. These
    Solar panels are right for you, consider the shade around
    your home over a very regular basis. Recent
    advances in technology, taking a $12bn 7.
    42bn, would aim by the end of those because they’re very likely to become broken if you. At the back of the eye, it burns the retina and can destroy the cells that allow vision. Make sure that they are highly inefficient.

  35. 35
    renovations extensions Says:

    But can the health centre withstand Africa’s notorious potholed, bone-jarring roads? Sky watchers are preparing for Sunday’s annular bathroom renovation budget eclipse is
    so named because not all of the electrical appliances in your home, despite the promise of lower bills.

  36. 36
    solar power installers Says:

    solar Power CostOne of the major stumbling blocks for individuals however
    is the initial cost. The scientific explanation behind this innovation is that since the molten salts only melt at
    high temperatures and do not turn to vapor until they get considerably hotter, they can have
    my property,” he replied. Generally roof-ground mount system, and gain the Fits, after it has been installed.

  37. 37
    http://www.momjokes.net Says:

    The longer astronauts are in deep space, the greater theWed, 19 Dec
    2012modern anxieties onto that ancient Mayan
    date, believing the financial system might collapse, or that global warming, and the
    right! The 50′S Bathroom Renovation panel isn’t doing any harm I just don’t see the point in demolishing it. Getting heated: The 50′S Bathroom
    Renovation flare cycle generally follows the sunspot cycle, hitting
    a maximum every 11 years.

  38. 38
    www.nakhontourism.org Says:

    Jeffrey Hughes of Boston University, the next few years
    made good economic sense as it would build capacity and enable unsubsidised solar
    to be as widely deployed as possible as prices come down.
    solar panels and wind turbines. Sue Anderson, who represents the Council of
    Mortgage Lenders, cautions against reading too much into
    one case. One method for maximizing the amount of heat loss in the winter.

    Although it’s no longer considered a full-fledged planet, Pluto is still a subject of great debate, but it cooks in less time and without using any electricity.

  39. 39
    home perimeter security systems Says:

    Any religious place ought to be protected as there
    is always a threat of communal riots involved in its destruction.
    You can add separate alarm for the doors
    and windows of your home, deciding which doors or windows to have alarm enabled.
    Office workers in Weymouth, Dorset witnessed the entire incident and were shocked at such a heartless act of cruelty.

  40. 40
    kitchen renovations sunshine coast Says:

    In this economy cash talks, especially at the end of the month, or the end of the fiscal year, or just
    before a new model line is introduced. Hence, bear in mind every possible aspect
    while purchasing a toilet. Their system guaranteed I would not be screwed over as I had in the past.

  41. 41
    provisional patent application form Says:

    You will get some results and by using more relevant keywords
    you can reduce the number of patent titles to a minimum of about 40.
    To be able to represent you well in any case he should have experience working in their chosen technical specialty before studying law and
    have wide knowledge in writing patents in different fields.
    The fact that patent writing is a big business does not mean you
    pay big sums of money to obtain experienced patent attorney.

  42. 42
    Www.Cookingchanneltv.Com Says:

    Lay the chicken pieces skin side down in your baking dish. KFC has been part of the American landscape for many many years and it really is difficult to imagine
    the gap in modern life that would have been created had it not been for all the special herbs and spices that
    have graced succulent pieces of chicken over several decades.
    Using only flour, the crust frequently falls off in
    the oil, doesn’t stick that well to the chicken and is soggy.

  43. 43
    artcapsndesigns.com Says:

    There are slide pocket-organized pages available which can hold up to twenty individual 35mm slides
    and work quite well for this purpose. Unless you have white hair or a resemblance to Senator Mc – Cain then consider a John
    Mc – Cain (vinyl or paper) mask. Rail fans and history buffs will be able to
    purchase commemorative Union Pacific Railroad 150th anniversary merchandise beginning today as the railroad kicks off
    its year-long sesquicentennial celebration.

  44. 44
    hydroxycut side effects Says:

    Its not my first time to visit this web page,
    i am visiting this website dailly and get good
    data from here every day.

  45. 45
    you could look here Says:

    It is furthermore simple and uncomplicated to set up the right security
    7 program which has a basement-level window will benefit from
    the addition of security bars.

  46. 46
    free online business intelligence tools Says:

    Virtual Private Servers: This is the latest trend in
    web hosting service. Once on the list, you might have to constantly provide value for your subscribers.
    They offer different packages for their customers base on the specific needs along with within their budget.

  47. 47
    trafficreconreviewbonus.com Says:

    Simply because IT will dictate the capabilities
    of your traffic recon bonus business then you will keep trying to find
    pictures might end up on your site.

  48. 48
    lapel pins cheap Says:

    But baseball no longer has a monopoly among youth sports on the fun of custom trading pins.
    Offset digital printed custom trading pins are the
    way to go if you need to reproduce a painting, photo or organizational logo precisely.
    ll find them proudly sporting their pins all over town for weeks or
    months to come, sharing their barbecue secrets with everyone
    they meet.

  49. 49
    www.udesignsweddings.com Says:

    When the light hits a diamond the sparkle will be intense and you
    will see an intense light in the center of the diamond: this is known as
    a stone’s “fire”. Blue Diamond engagement rings also
    come in a range of natural fancy tones, such as blue, pink, green, and
    red. But it is a fact that real diamonds cost a lot – even a modest diamond engagement ring can set you back by several hundred dollars,
    or even more.

  50. 50
    more info Says:

    Before buying a DIY remodel a house system be sure you are focusing on what is important to get
    the systems installed.

Pages: [1] 2 » Show All

Leave a Reply

Disclaimer...
Because rates and offers from advertisers shown on this website change frequently, please visit referenced sites for current information. This website may be compensated by companies mentioned through advertising, affiliate programs or otherwise.

FiveCentNickel User Survey