If you’ve seen advertisements on TV for loans without a closing cost, you may be wondering what the specifications of the financial agreement may be. The term “no closing cost” is an incentive provided by banks and credit agencies as a means of no out of pocket expenses for a refinance option for your current mortgage. No closing cost refinance loans tend to refer to the agent’s commission and the tax status of a loan process, so that if you are trying to lower monthly payment or extend the term of your current mortgage, you can do it with a minimum of payments and headaches.
Refinancing is by no means a new incentive for homeowners, and a refinance loan without excessive costs is an appealing option for a family who needs some extra cash for bills or holiday expenses. However this type of loan is different from a standard mortgage, and typically is not structured in the same matter as a standard loan whether short or long term, due to the circumstances of the specific borrower or lender. In the case of no closing cost loans, the lender or broker provides the funds necessary for the costs of the transactions. These fees can be numerous for tax purposes or for corporate policy, such as a settlement fee, underwriting fee, processing costs, escrow, and can add up to a substantial percentage of the loan itself. The appeal of eliminating these costs, then, makes such loans very favorable.
However, there are many ways which banks make up the difference, in some cases by simply adding the sum of these fees onto the loan itself – beware of claims of zero fees, as they may require borrowing larger sums of money or at a higher interest fee to make up the “free” benefit. Most often, credit agencies simply add these fees into the interest rate, increasing a modest five or six percent interest on a loan to a substantial ten or twelve percent. Even with sterling credit or references, the spike in interest rates can more than offset the benefit of fee elimination.
Even in the event of no closing cost refinance loans, some banks may selectively choose which fees are excluded, setting up a list of surprises for customers who believed they were entering into an agreement, and then see the bank charge third party fees, taxes, and insurance. It’s important to discuss the specifics of your preferences with an accountant before entering into an agreement or commitment with a credit agency.
A loan of one hundred thousand dollars – the average cost of an American mortgage –may be offered at a six percent rate for a homeowner with good credit, and the lure of no closing costs can eliminate several thousand dollars in taxes, escrow, and commissions, but even at a ten percent interest rate the allure of “no closing cost” is completely offset by the increase in interest.
There are advantages to no closing cost refinance loans, however. Depending on the duration of your home ownership, the upfront savings can help with certain remodeling or modifications to the house which give a greater return on the final property value. An addition to a house, a patio or a pool can bump up the value of a house by far more than the value of interest on a loan. The break even point is roughly five or six years, so short term improvements with refinance loans yield greater results than the additional cost in interest. If you believe a refinance loan for your current property is an appealing means of consolidation or upgrade, consult an accountant to make sure you can get favorable terms from a bank.
Financing