The No-Cost Refinance Gambit
August 23, 2013 | Buying
A lot of real estate agents are just there for you when you buy or sell. That is one of those conventional approaches that we don’t think makes sense.
CHR agents want to be there for you not only when you are buying and selling but also while you are owning your property. For example, we can help you when you are refinancing a property you already own. When does it make sense to do so? What is the best way to refinance? We can help answer these questions.
One of the claims we hear frequently is that you can refinance for no cost. As one ad famously puts it, “Nothing is rolled into your loan. We pay for your appraisal, credit report and title fees. It’s the biggest no-brainer in the history of the earth.”
Is it really a no-brainer?
Is it even possible to do a no-cost refinance?
The answer is kind of “Yes” and mostly “No” and here is why: Any lender can give you a no-cost refinance. They all do it the same way … by raising the interest rate you pay. Consider these two options:
|Scenario No. 1||Scenario No. 2|
Scenario No. 1 is a no-cost refinance. You pay no fees at closing. In this sense, it is possible to do a no-cost refinance.
However, the no-cost option has you paying more interest over time. You’ll pay $6,174 more interest over five years with Scenario No. 1 versus Scenario No. 2. The extra interest cost over seven years is $8,580. The cost of a no-cost refinance is not paid up-front but is paid over time in the form of higher interest payments.
And this is why ultimately there is no such thing as a no-cost refinance. The old adage actually applies here: “You can pay me now or you can pay me later.” (Yes – part of being innovative is knowing when the conventional wisdom really is true)
The decision on whether a no-cost refinance is right for you comes down to how long you’ll be in your current home. In the above example, the breakeven point is 53 months. If you know you will be selling the house in three years for example, take the no-cost deal. It will cost less in the long run.
On the other hand, take Scenario No. 2 if you’re pretty sure you’ll be there until the kids are out of college in 12 years. It will save you thousands of dollars over time.
By the way, you don’t need the $5,500 in hand to take advantage of the lower interest rate offered by Scenario No. 2. The loan balance can be raised by $5,500 so that you bring no money to closing. The numbers shift a little but the same principle applies. You reach a point where you are better off with the lower rate in the long run.
Let us connect you with a lender we trust. That lender can educate you about your refinance options and help you make a savvy decision that favors YOU rather than the bank.
Innovation Series-Thinking Outside the Trapezoid
Now Reading Part 3: The No-Cost Refinance Gambit
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