How to Refinance with No Closing Cost?
No-Cost Refinance is one with an interest rate high enough that the lender's discount or rebate covers the closing costs. Rebates or discount points are negative points. Lenders charge points on low-interest rate loans and pay them on high-rate loans. For example, on a 30-year fixed-rate mortgage, they might quote 6.75% with 2 points, 7.25% with zero points, and 8% with a 1.5-point rebate. If the 1.5 point rebate covered the settlement costs, 8% could be the no-cost rate. In such cases, the borrower taking a no-cost refinance is paying the settlement costs in the rate. If he pays off the mortgage in a few years, it's a good deal. If he has it a long time, it is a costly deal. In sum, No cost refinancing usually means that the lender agrees to pay all normal closing costs when refinancing a mortgage. Some of these costs include the loan origination fee, appraisal fee, credit report fee, attorney's fees and title fees. One reason to consider no cost refinancing might be because of job loss or a job change resulting in lower income. Current monthly payments may be too high to maintain and as a result payments are late and charges are mounting up. Late payments are resulting in a lower credit score and credit history is being damaged. Damaged credit history will mean paying higher interest and fees for future purchases. To avoid damage to credit consider refinancing with a lower interest rate. This should also result in a lower monthly payment and shorter payoff terms.
Reasons to choose a No Cost Loan or No Cost Refinance:
* You are not sure how much longer you will stay in the house or you may be relocated within 3 -5 years.
* Your loan balance is > $200,000
* You are not sure how much longer you will stay in this new mortgage. In some states, the average loan pays off in less than 4 years. It typically takes 4 to 6 years to recapture closing costs if you decide to pay them when refinancing your home. Remember that you don't just refinance to get a lower rate. It could be for a medical emergency, college education for your children, to remodel the house etc.
* You believe that there is a chance that rates might go lower in the future. If they do, we can refinance you once again with no costs.
What Goes into the Refinance Decision?
There are many reasons why people consider refinancing home mortgages, ranging from wanting to withdraw their cash in equity to reducing their interest rate to paying off credit card balances to lowering their payments. Some reasons are wise while others are not. Everyone has to review their own situation and decide what is best. But here are three good reasons when it would be "wise."
To Get A Better Fixed Interest Rate. When people are ready to buy a house, they have to accept the interest rates that are available at the time. However, as time goes by, it may be possible to get a better interest rate. There is more than one reason why a substantially lower rate may now be available. If bad credit was a problem when the loan was issued but the credit history has now improved, then refinancing home mortgages would definitely be a wise decision. A bankruptcy in the past or simply poor payment history is enough to cause potential home buyers to only qualify for a bad credit mortgage. But with consistent effort to turn things around, credit histories can go from bad to good, thus qualifying for a lower interest rate.
Consider the tax benefits: If you itemize your tax deductions, the interest you pay on you mortgage or a home equity loan may be deductible. Refinancing your mortgage and taking cash out or borrowing through a home equity loan or a second mortgage may provide the money to pay off higher rate loans, such as credit cards or auto loans, and provide a tax deduction as well.
What are Rate & Terms for Refinancing Rates
If you are just trying to refinance the loan you already have, and not take out any equity, the type of loan you are looking for is called a Rate and Term loan. With this type of refinance you can change the term (or length of your loan) and you can also change the interest rate. The purpose of a rate/term refinance is to change to a lower interest rate or change the term of a loan without advancing new money on the loan. Closing costs can be rolled in. The borrower may receive a maximum 1% of the loan amount in cash at closing.
Your new interest rate will depend on how much money you are borrowing and for what length of time. Mortgage companies use something called a 'loan to value' ratio to calculate this. For instance, if you had an $80,000 home and an existing mortgage of $40,000, you would have a loan to value ratio of 50%. Basically, the higher your loan to value (LTV) ratio, the higher the interest rate.