If you don't have enough cash to refinance your home loan, you can ask your lender about mortgages with no closing costs and no points. However, you need to read the fine print before you sign on the dotted line. You might have dodged these costs at the time of closing, but in many instances closing costs and points can come back to haunt you down the line.
Mortgage points fall into two categories: origination and discount points. Origination points are fees that you pay to your lender for processing your loan. The loan officer normally receives some of this money in the form of a commission check. If you don't pay an origination fee, you may have to pay a higher interest rate so that the lender can cover these costs over the course of your loan. Discount points are pre-paid interest payments. You can buy down the rate on your loan by paying some of the interest upfront. You may hurt yourself if you don't pay discount points because you end up paying a higher interest rate for the entire loan term.
Closing costs, as with points, fall into two categories: lender's fees and third-party expenses. When you refinance a loan, lenders often require you to pay a variety of administrative fees to cover the cost of ordering your credit report or the printing of the loan documents. In some instances, "no closing cost loans" are mortgages on which your lender agrees to waive these fees. Third-party costs include the recording fees and documentary stamp taxes that you must pay to file your mortgage with the local authorities. Legally, these fees have to be paid, and you will see these costs listed on the closing statement. If you truly have a "no closing cost" loan, your lender should also pay these fees on your behalf.
Recording fees and state-assessed document stamp taxes often run to hundreds or even thousands of dollars. Your lender may agree to cover these upfront costs because in the long run your lender stands to recover this money through the interest payments you make on your loan. If you pay off your loan within just a few months, you have hardly paid any interest and your lender may not have had time to recoup this upfront expense. To prevent this from happening, some lenders include early payoff penalties in loan contracts. In many instances, you are required to reimburse your lender for these upfront closing costs if you pay off your loan within a few years of taking out your mortgage. Other lenders just hike up interest rates to cover these out-of-pocket costs.
You pay closing costs and points at the time of closing, but even if your lender covers these fees a refinance loan will still result in some out-of-pocket expenses. Home appraisals typically cost $300 or $400, and you are responsible for covering this cost. If you don't have an existing title policy tied to your current home loan, your lender may require you to buy one when you refinance. Title insurance protects you and your lender in the event that legal issues arise concerning the deed to your home. Title policies can cost several thousand dollars, which means you may end up with a lot of upfront expenses on your "no closing cost" loan.
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