Mortgage Refinancing - No Closing Cost - Is it For Real?

You're bombarded with the ads for mortgage companies almost 24 hours a day it seems. "Mortgage Refinancing – No Closing Cost" Some mortgage companies claim they can get you a great mortgage with no closing cost. Others trumpet how they can get you the best rate and fee structure. Still others claim they can get you both the best rate and fee structure and no closing cost. What gives? Is it really possible to get a great rate on your mortgage refinancing effort and pay no closing cost?

First of all, there are a couple of things you need to watch out for. One line the mortgage companies love to use is "No out of pocket cost" Think about that for just a second. That's not the same as no closing cost, is it? In many cases, "No out of pocket cost" means they simply roll the closing costs into your loan, there by increasing your loan balance from the word "Go". Such a mortgage deal usually isn't a very good one. You'll just end up paying not only the closing costs, but the interest on them for 30 years too.

What the heck are closing costs, and why are they part of the mortgage transaction in the first place? You'll find the closing costs can be under one of four general classifications; government fees (taxes, deed recording, etc.), lender fees (points, loan origination, documents, setting up escrow, underwriting), third party fees (title search and insurance, home inspection, appraisal, etc.), escrow and interest (advance payments for PMI, real estate taxes, interest and insurance).

The lender has little control over third party and government fees, however they have supreme control over their own fees. Do they need to charge you an origination fee, points or doc fees? That depends upon how badly they want your business, and how much they're making on the back end of the deal. In most cases they'll sell your loan to another lender on the secondary market. This is known as "selling the paper". They make thousands of dollars when they do this transaction. The more interest they charge you up front, the more they make when they sell your loan to another lender.

If the mortgage company really is offering to pay all the closing costs, check the interest rate you're being offered. Is it competitive? In many cases they claim to be letting you avoid paying the closing costs because they're making plenty of money. At least they're truthful. They are making plenty of money. That's because in the vast majority of cases where the mortgage company offers to pick up the closing cost tab for you, they're kicking up the interest rate a quarter or half a point. In the long run, you'll typically end up backwards on such a deal.

Take a look at this example: You're getting a $250,000 mortgage. Closing costs typically run about 4% of your loan, so figure about $10,000. The key to avoiding excessive fees and other closing costs is to ensure you compare the lender's good faith estimate they provided when approving your mortgage. If you've done so, you'll usually be around the 4% figure. If you're getting a 6% mortgage, you'll pay $289,595 in interest over the term of the mortgage. If the mortgage company changes the interest rate to 6.25%, it may not seem like much, but you'll now pay $304,145. Is it worth saving $10,000 now to pay $15,145 extra in interest over 30 years? It may be depending upon your financial situation.

If your mortgage company rolls the $10,000 into the loan balance, you'll pay $301,179, or almost an extra $12,000 on a 6% mortgage. If they both up the interest rate and roll in the closing costs, look out! You'll end up paying $316,311 in interest over the life of the loan, or almost $27,000 more over the life of your mortgage. What can you do with $27,000? It's up to you. Only you can make the decision which mortgage company to use. The fact is most of them have access to basically the same mortgage products. What, and how, they charge you for them is up to you. Choose your mortgage and mortgage company carefully.