Are you thinking about taking out a no cost refinancing loan to help you secure a mortgage? Here’s what you need to know about this type of refinancing.
What Is No Cost Refinancing?
For refinancing a mortgage, the current loan is paid off through a new loan with lower interest rates. This gives you the opportunity to benefit from lower monthly payments and less interest, meaning that you can save money from the process. Sounds good, right? It can be, but you need to make sure that it really will be the right option for you before you dive in. Take some time to look at the pros and cons to decide if it’s what you need.
Pros of No Cost Loans
Some of the advantages of no cost refinancing are:
- No upfront costs. You don’t have to pay upfront for this type of loan, which can be very appealing if you’re trying to get a foot on the housing ladder or don’t have a lot of money at your disposal. The usual closing costs are usually paid by the lender in most cases whereas a no cash loan means that the upfront costs are added to the loan balance rather than being settled by your lender. This is very attractive for those who literally don’t have the money but don’t want to have to wait to take out a mortgage. Bear in mind that some closing costs won’t necessarily be covered by your lender, such as Escrow fees or prepayment charges on a previous mortgage so if those apply to you, you’ll still have to foot these costs yourself.
- Make sure that it really is no cost. It sounds obvious but as mentioned in the previous paragraph, you could easily get confused between no cost and no cash loans. As has been highlighted, no cost means that your closing costs are paid for you but this isn’t the case for no cash loans, and you can expect to have them added to the overall loan balance. This usually means that you ultimately pay a lot more than the original loan so you’ll want to make sure that you’re definitely going down the no cost route.
Cons of No Cost Loans
Some of the downsides of no cost refinancing are:
- Higher interest. The lack of upfront fees can make a no cost mortgage loan look more appealing than it actually is. Because the upfront costs are taken care of by the lender rather than being paid by the borrower, you can expect to pay higher interest rates as a compromise.
- Advantage is short term. To get the most out of a no cost loan, you need to be in a position to pay off the balance in a relatively short time period so that you’re not still paying it off beyond the break-even point. If you can do this, the amount that you’ll save from the closing costs will be more than you’ll pay in interest, putting you in a good position overall. If you can’t do this, there’s a good chance that what you’ll initially save will be canceled out by the higher interest rates and you won’t actually get the good deal that you were anticipating.
A no cost refinancing loan can be a great idea to help you arrange a mortgage but only if the circumstances are right. You can save money if you’re able to pay off the loan before you reach the break-even point as the higher interest rates won’t have as much impact, but it’s not such a good option if you’d need to spread the repayments out over a considerable amount of time as the interest will soon cancel out anything saved on the closing costs. Think carefully before you jump into arranging a no cost loan and take your time deciding whether it’s really the best option for your scenario.
Have you ever used no cost refinancing? What was your experience?