The term ‘no closing cost refinance’ is used in many advertisements and announcements in order to attract potential borrowers who need to refinance their current mortgage. The perception from the borrower’s point of view is, “Oh, no closing costs to refinance? I like free! I’ll give them a call.” It must really work; these types of advertisements have been around for years.
The problem with the no closing cost refinance slogan is it’s not true. No closing costs when refinancing? Well, gosh, how the heck does this work? Everyone works for free?
The people involved in a refinance include the lender, the appraiser, the title company, and many others depending on your location and contractual obligations. Trust me when I say, everyone gets paid.
So what exactly does no closing cost refinance really mean? It’s tough to say because there is no agreed upon definition of what a closing cost is.
From a lender’s point of view a closing cost specifically means a cost to them, the lender. From this point of view it’s true. Instead of collecting a fee from you, they get paid by the end investor (the entity providing the funds for you). So, in essence, their announcement is true; a no closing cost refinance.
Now, as stated earlier, from the borrower’s point of view, it shouldn’t cost anything to refinance. What the buyer finds out is there are no costs paid to the lender but there are still plenty of other closing costs.
How many other costs? Well, that depends on a bunch of factors but some typical costs could include:
• Appraisal fee ($300-$500 average)
• Up front prorated taxes (possible thousands)
• Title insurance (few hundred to over a thousand)
• Others
Of course, some of the ‘non closing cost’ costs can be rolled back into the mortgage, decreasing the amount of money that has to be brought to closing. Again, this depends on what the cost is and how much.
In any event, when the times comes and you need to refinance be sure to ask the lender how much out of pocket money you can expect to bring to closing. You should be provided an itemized list of predicted costs.
The bottom line is a no closing cost refinance, in many cases, can be very costly.
In summary, there are many lenders who advertise the phrase no closing cost refinance. After a little digging, it turns out that a no closing cost refinance has a lot of other expenses that can actually cost quite a bit.
