Other Costs Associated With The No-Closing-Cost Refinance
You can choose between two different options with a no-closing-cost refinance: either an increased interest percentage or a higher loan balance. Not every lender offers both types of no-closing-cost refinances, so make sure your lender can offer you the option you want.
Increased Mortgage Rates
If your lender offers you a no-closing-cost refinance without adding funds to your principal, you’ll need to accept a higher interest rate. A higher interest rate doesn’t change your principal loan amount, but even a small change in your interest rate can mean you’ll pay much more interest over time.
Example: Refinancing With An Increased Mortgage Rate
Say you refinance to take out a $150,000 mortgage loan at 6.5% interest over a 15-year term. You’d end up paying a grand total of $85,199 in interest over the course of your refinance with this interest rate.
Closing costs are usually 3% – 6% of your loan amount. Assuming closing costs totaling $6,000 (4%), the amount you’ll pay for interest plus closing costs will be $91,199.
Now, your lender offers to waive your closing costs if you agree to take the same loan but with an interest rate of 7.1%. In this instance, the total amount you’d end up paying in interest by the time you pay off your loan is $94,196. This means that you’d pay nearly $3,000 more for your loan.
As the interest rate increases, the total amount that you end up paying increases. Crunch the numbers before you agree to take a loan with a higher interest rate.
Higher Loan Balance
When you choose to roll in your closing costs, your total loan balance increases. For example, let’s say that you’re refinancing a $150,000 loan with $6,000 in closing costs. With closing costs rolled in, your new balance is $156,000.
Example: Refinancing With A Higher Loan Balance
Let’s compare the difference between a $150,000 refinance and a $156,000 refinance at a 6.5% interest rate. Let’s also assume that the loan’s term is 15 years. For the $150,000 refinance, your monthly principal and interest payment would be $1,307. With a $156,000 refinance, your monthly payment would be $1,359. That’s a difference of about $52 a month.
Because there’s a higher balance, you’ll also pay $3,408 more in interest over the life of the loan than you would on the $150,000 loan.
Before you roll in your closing costs, make sure you can cover the higher monthly payment.
