Mortgage Myths vs. Facts #1: “No Cost Refinance” programs have no fees or out-of-pocket costs.

Fact: The lender pays your closing costs but increases your interest rate or adds the fee costs to your loan amount to make up for their missing fee income.

You’ve probably seen or heard ads for a “no cost refinance” loan, but what does that really mean? How do these loans work?

These ads promise the homeowner no fees or out-of-pocket expenses when refinancing their current mortgage. But the lender must make money somehow, so they increase the interest rate or add the fee costs to the loan amount to compensate for the missing fee income.

The tradeoff is that the borrower pays nothing now, but they will end up paying more over the life of the loan in the form of higher monthly mortgage payments and more interest over the term of the loan.

For some borrowers, a no-cost loan may be the better option if they don’t have the funds available to pay fees at closing. If you have enough money to pay closing costs, then you need to decide if you would prefer to hold onto your money or get the lowest possible interest rate.

Pay Attention to the Details.

Be sure to read the fine print of your “No Cost Refinance.” These programs can vary by lender. Some may only cover lender fees such as origination, underwriting, and processing fees, while others may include third-party costs like title and appraisal expenses. Pay attention to what fees are covered to determine if it’s a good or bad deal.

The benefits and costs of a “No Cost Refinance” depend on each borrower’s unique financial situation, what the associated fees are, and what the interest rate will be.

Although you may avoid out-of-pocket expenses upfront, these costs are not paid by the lender and are not a true no-cost loan. Be sure to do the math and compare your options before you make your final decision.

If you have any questions, please contact a First State Bank Mortgage loan officer today.