Glossary Terms

Cash-Out Refinancing
A refinance in which the new loan amount exceeds the total needed to pay off the existing mortgage. The difference goes to the borrower and can be... <a href='/glossary/what-is-cash-out-refinancing' title='See the full definition of Cash-Out Refinancing '>read more</a>
Rate and Term Refinancing
A mortgage refinance that replaces the existing mortgage with a new one but does not disburse cash to the borrower. Rate and term refinancing is... <a href='/glossary/what-is-rate-and-term-refinancing' title='See the full definition of Rate and Term Refinancing'>read more</a>
Refinancing means replacing one loan with a new, better loan. Improving the terms of a loan can mean obtaining a lower interest rate, a lower monthly... <a href='/glossary/what-is-refinancing' title='See the full definition of Refinance'>read more</a>

One of the biggest drawbacks of refinancing a mortgage is the cost involved: lender fees, title insurance premiums and escrow charges, as well as payments to appraisers and other third parties. Even homeowners who could benefit greatly from refinancing may not be able to cover the costs. To these consumers, then, the term "no closing cost refinance" has great appeal.

What is a "No Closing Cost Refinance"

"No cost" refinancing doesn't have a universal definition. In fact, the term "no closing cost refinance" has several common interpretations:

  • A loan with no lender fees
  • A loan with no costs at all
  • A loan with no out-of-pocket costs

Any time a lender pays costs for the borrower, the money comes from another aspect of the transaction. In fact, lenders get money to pay these costs by charging a higher interest rate. That allows them to collect more interest over time or simply sell the loan to investors at a higher price.

Refinance loans with "no out-of-pocket costs" don't come with higher interest rates. Instead, the closing costs are wrapped into the loan, increasing its balance.

No Cost Refinance Advantages

No cost refinancing may be the only option for homeowners who don't have the money to pay closing costs outright. However, even those who can afford to pay them might be better off with the no-cost product. What if, for example, a homeowner could save $200 a month by refinancing, but the new loan comes with $4,500 in fees? It would take nearly two years for the borrower to hit the break-even point -- the point at which the monthly savings covers the cost of refinancing. If the homeowner ends up selling before then, he or she will lose money.

However, what if the borrower can save $100 a month by choosing a no cost refinance? The savings is immediate because there is no break-even period. For those whose plans for their home are up in the air, then, a no-cost refinance can make a lot of sense.

No-cost refinancing can also simplify mortgage shopping. If the costs are the same (zero) and the loan type is the same, the only variable on the table is the interest rate. In fact, in a 2008 study, HUD found that borrowers were much better at driving a bargain for their mortgages when they shopped this way.

The borrowers who got the best deals were those who got the simplest deals, the borrowers who took out "no-cost" loans. Two principles appear to operate in favor of the no-cost borrowers: simplified price shopping (no-cost borrowers can shop on rate alone because there are no up-front cash charges) and the commitment from the lender that the rate is set and no cash charges will be added between commitment and closing.

Those who know they'll be in their homes for many years may prefer another option -- the no "out-of-pocket cost" refinance, also referred to as a "limited cash-out" refinance. This allows them to buy their rates down to achieve lower payments without emptying their wallets at the closing table. To accomplish this sort of refinance, the borrower must have sufficient equity because the new mortgage balance will be larger.

No Cost Refinance Disadvantages

No cost refinancing does in fact cost more -- if the charges are wrapped into the loan, there is a larger balance to repay. That means the borrower is paying interest on the refinancing costs over the life of the loan. For example, $4,500 in closing costs amortized over 30 years at 4.125 percent costs the borrower a total of $7,851. If the costs are absorbed by the lender collecting a higher rate, there are obviously higher interest costs. For the example above, the no-cost loan saves $100 a month instead of $200. Over a five year period, then, the no-cost loan costs $6,000 more (60 months * $100), but saves $4,500 in closing charges. Therefore, the added costs over five years are $1,500.

Choosing a Refinancing Option

So, how does a homeowner know which refinance is best? In general, the no-cost refinance makes most sense when the borrower does not expect to have the loan for more than a few years. A more specific answer can be obtained with LendingTree's Refinance Breakeven Calculator, which allows borrowers to calculate the savings and costs of no-cost, no out-of-pocket cost and traditional refinances (the costs can be changed by opening up the "assumptions").

No cost, no money down or closing cost

If you can find a no-cost mortgage that's better than your current loan, you should ALWAYS refinance. Otherwise, consider the benefits of refinancing to make sure it's worth it for you.

Lower your monthly payment

Lowering your monthly payments can loosen the belt on your household budget and allow you to focus on some other changes you might want to look into – like switching to a fixed-rate mortgage. Your lender will be able to help you address all the variables.

Lower your interest rate
If you’re not significantly paying down the principal, you could be throwing money away. By lowering your interest rate, you could conceivably pay off your mortgage faster while you’re chipping away at that principal, too.

Refinance rates now in Woodbridge, NJ [Change this]

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    Home Price (Purchase)
    When you get a mortgage to purchase a home, the lender uses the lower of the agreed-upon purchase price or the property's appraised value to determine your maximum loan amount. The loan amount divided by the property home price equals your loan-to-value ratio, or LTV. That ratio is one of the major factors that lenders use to set your mortgage rate. If your LTV exceeds 80 percent, you'll probably be required to pay mortgage insurance, which increases your monthly payment. If the property appraises for less than the agreed-on purchase price, you are not usually required to complete the purchase.
    Home Value (Refinance)
    This is your estimate of the current value of your property. When you refinance, your home is almost always evaluated by a licensed appraiser. The refinance loan amount divided by the property's appraised value equals your loan-to-value ratio (LTV), and that number is one of the major factors that determine your mortgage rate. To get an accurate refinance rate quote, your home value estimate must be reasonably accurate.
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    Down Payment
    The down payment is the amount you pay upfront when you finance property. Your purchase price minus your down payment equals your mortgage amount. The higher your down payment, the more likely you are to be approved for a home loan. If your down payment is less than 20 percent of the purchase price, you'll probably be required to pay for mortgage insurance, which increases your monthly payment.
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    Credit Score
    Your credit score is a number designed to measure your credit-worthiness. It's based on a formula that combines many factors, including your payment history, amount of credit used and number of accounts. This number is used by lenders to calculate the probability that you'll default on your mortgage. Most lenders won't approve mortgages to applicants with credit scores lower than 620. Your credit score is one of the most important factors that determines your mortgage rate - applicants with higher scores are offered better mortgage rates.
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