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Is There Any Truth to “No Cost Refinance”?

written by: ciel s cantoria•edited by: Donna Cosmato•updated: 1/8/2011

If you’re considering some lender’s offer of refinancing your loan under the “No Cost Refinance” scheme, you better think twice. Find out in this article about predatory loans and how the borrower ends up saddled with higher amortization costs.

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    The Truth about No Cost Refinance

    no cost refinance 

    If you have plans for getting a loan refinanced, do not be lured by eye-catching advertisements about “No Cost Refinance”, because there is no such thing. All loans have corresponding costs, whether regular mortgage loans or refinance mortgage loans.

    “No Cost Refinance” is merely hype to entice you into getting the loan processed and approved, with all the proper trimmings, and only takes you by surprise later. If the lender offers you a refinancing loan and acts magnanimously by telling you that you don’t have to worry about the closing cost fees, be advised against accepting it.

    This is actually a type of loan where the lender or broker pays all the closing cost fees on your behalf and is called a predatory loan. However, the lender, of course, is reimbursed by adding all the fees to the principal balance of the refinanced debt. Hence, this results in higher monthly amortizations, and even adds to the interest, since what could have been out-of-pocket expenses became part of the loan. On top of that, it will be too late for you to assess the fees charged against your account.

    However, some borrowers are talked into this kind of arrangement. The idea of not shelling out actual cash is hard to resist. However, it is just like borrowing additional funds in order to get your mortgage loan refinanced.

    Below is an example to help you decide if a no cost refinance loan is beneficial to you or not.

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    On a $500,000 loan, with a yearly interest rate of 6 percent, you will have to pay a normal 1 percent origination fee or $5,000. This origination fee is paid to the bank or lending company where the mortgage loan originated as their fee for processing the closure of your loan.

    For purposes of computation, let us assume the total of the other closing cost fees amounts to $3,000. Hence, you will be required to pay out a total of $ 8,000. If you proceed with the no cost refinancing scheme, the interest rate now increases from 6 percent to 6.5 percent, or a .5 percent increase. This is due to the fact that the additional $8,000 added to your refinanced mortgage also earns interest.

    Instead of paying only $16,398.58 in interest expenses per year, you pay $17,778.50, or a net increase of $1,379.92, in interest expenses. If the loan is a period of 30 years, the unnecessary increase in interest expenses of $1,379.92 multiplied by 30 years means you pay unnecessary costs of $41,397.60 in interest expenses for the duration of the loan.

    Consider the fact that the total amount of $41,397.60 could have been part of your available funds instead. The unnecessary increase of $1,379.92 per year divided by 12 months means you could have set aside $115 per month as your savings instead of incurring it as a needless expense.

    If interest computations on loans confuse you, make use of the amortization schedule calculator or the refinance calculator available on the Internet. All you have to do is input the variables like the interest rate, loan term, and start date, and the calculator automatically computes the amounts of monthly principal and interest due, computes total payments or total interests to be paid, and even estimates the pay-off date or due date.

    A no cost refinance loan is too good to be true because financing institutions like banks and lending companies also incur expenses to operate their business. In the same way that individuals try to maximize earnings by cutting expenses, banks also try to maximize their earnings through their marketing schemes and strategies.

    In fact, if you are aware of the nature of some refinance closing cost fees, you can negotiate a lowering of these fees because some lenders waive other charges like application and processing costs.

    Photo courtesy of Morguefile.