No-Cost Refinance Loans: Pros and Cons
Many borrowers are frequently confronted by marketing messages for no cost refinance schemes which claim that you can refinance your current mortgage without necessarily paying any expenses. Such a scheme may in fact contain certain hidden charges or fees, and although you may initially be required to cover some administrative costs, you will end up paying much more in the long term with an increased mortgage rate. The best way to avoid paying any upfront costs is to make use of a mortgage loan calculator. These calculators can be easily downloaded from the internet and allow you to calculate how much money you could save by opting for a different repayment plan. Even if you mistakenly opt for a ‘no cost’ refinance, it will still have implications on your mortgage repayments.
It is extremely important to understand the precise costs involved with any no fee plan, including those associated with switching lenders. You may pay a number of fees, including application and processing fees, legal or administrative fees, and other miscellaneous costs, such as stamp duty, home insurance, and landau property tax. And remember that although you won’t need to pay fees to switch lenders, you will inevitably have to cover ongoing fees at renewal, which could significantly reduce your savings.
Most people will initially choose lenders who offer competitive rates, but then they may decide to shift to a different provider at some point. At this point it makes sense to look at what other lenders are charging. There are two main ways to do this, and these include putting in applications with each lender separately, or using one mortgage payment calculator. Although you should first try and get quotes from at least three lenders before deciding which to go with, taking the time to compare them against each other will help you achieve your objectives. In general, all lenders will charge you different fees when refinancing your loan, and the no fee lender fees typically apply to mortgages which have already been taken out.
Typically the no cost refinance loan will result in a lower repayment amount, which means you will be paying less overall interest over the term. However this is offset by the higher mortgage rate, and the lender will add on other fees to compensate for the increased risk involved in funding the loan. When the borrower’s mind is set on shifting to another lender at some point, they may not have enough funds available in their income stream to keep paying the higher mortgage, so they may wish to keep paying closing costs upfront. But even if the borrower has sufficient funds to maintain the repayments on the new loan, he or she will still have to consider the fact that in six months’ time the same debts will have reappeared in their finances, and they could end up paying even more interest.
The other major disadvantage to this type of refinancing is that the homeowner may end up being stuck in a situation where they cannot afford to keep paying the payments on the new loan. If they are unable to sell the home before the maturity date of the new loan, they may end up losing it to the competition. They may also end up losing valuable equity in their property, which may put them at greater financial risk than they were in the beginning. The longer the period of time they are unable to keep paying the higher interest rate, the more likely the situation will deteriorate and they will end up in foreclosure. This is something they need to carefully consider and plan for.
Another disadvantage to the no closing cost refinance loan is the fact that many borrowers do not take into consideration the hidden costs that may be charged by lenders. For example, there may be prepayment penalties, and there may be hidden service charges. These fees will accumulate over time and result in additional amounts payable to the borrowers. Some lenders will require borrowers to submit paperwork for each and every transaction they conduct, and these fees will increase with each transaction. Other lenders charge additional fees for different services. Many borrowers do not take into consideration all these costs when they sign the paperwork, and some even unknowingly agree to them.
Even though this arrangement may be attractive to borrowers who want to save money, they have to ask themselves whether this is really the best option. Saving money is important, but at times, doing things in a shortcut is not always the best way to go about things. Sometimes, going with this type of refinance loan may not give you enough time to conduct thorough research and compare the different offers from different lenders. You have to do your homework if you want to get the most competitive loan deal.
With no closing cost loan options, there are some advantages. However, there are also disadvantages. If borrowers fail to disclose important information about their income or credit history, they may end up spending more money on loan fees and closing costs than they would have had they just told the lender upfront what they owed and why they need the loan. Borrowers should not allow themselves to be baited into signing a contract for a refinance when the conditions and terms of that contract do not suit their situation. There are other options such as getting a second mortgage to pay for the interest on the first one. This is still a good option, even with no cost refinance loans.