The housing market is still struggling, but that doesn't mean there aren't deals out there for borrowers. Among the options you may be offered when applying for a mortgage refinance is a loan with no closing costs. Here is what you need to know about getting this type of loan.
No closing costs? Really?
It is important to understand exactly what is meant by no closing costs when applying for a refinance. Some mortgage lenders will actually cover the closing costs on a mortgage loan. That means you'll have fewer out-of-pocket costs when refinancing. But it also means that you'll pay a higher mortgage rate.
In this low-interest-rate environment, it actually might not be a bad thing to pay a slightly higher rate to have all those fees waived. Ask mortgage lenders to compare the closing costs, principal, interest rate and payments of a refinance with and without you paying the closing costs.
Other lenders may offer a loan with no closing costs, because they actually include all the fees for refinancing in the mortgage loan. So instead of paying these fees up front, they become part of the principal and you repay them with interest over the loan term. Always find out exactly how the closing costs are being paid when evaluating loan packages.
It is also important to find out if there is a prepayment penalty associated with a loan. Some no-closing-cost loans have such penalties to discourage people from refinancing within the first few years after borrowing money.
Types of closing costs
If you're wondering what fees are considered closing costs, talk with your mortgage lender. But in general, closing costs include nonrecurring fees for title insurance policies, attorney fees, home inspections, escrow, transfer taxes and recurring fees. Other closing costs may be associated with your home refinance, so ask for a Good Faith Estimate which should outline all the fees.
Closing costs also include some recurring fees that will be paid out repeatedly over the life of a mortgage. Those costs may include premiums for home insurance, flood insurance if you live in a flood zone, property taxes, prepaid interest and mortgage insurance premiums.
Cutting a better deal
While most borrowers end up paying their own closing costs, there are situations where sellers may be willing to foot all or part of the bill. With so many people desperate to sell homes these days, you may be able to work that to your advantage when dealing with closing costs. Just make sure you know whether your mortgage lender allows sellers to pick up the closing costs. Get this information before negotiating over the price of a home so you'll be equipped with all the information you need.