Zero Cost Mortgage Refinancing

Large closing fees can sour the deal on any refinance. In this article we’ll take a look at the options available for the borrower to make that refinancing deal pay dividends.

Thanks to the slew of great interest rates available to borrowers in recent years it’s become much more common for borrowers to refinance their mortgages once or even several times during its life. While this may help bring down rates, shorten loan terms or free up much-needed cash, one problem is that they always come with costs.

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You see, when you refinance your mortgage you are, essentially, settling your old loan and taking out an entirely new one. As such you face the same origination, appraisal and title fees, as well as legal costs and a whole host of other incidental charges. These costs may actually make your once-attractive refinancing deal cost more in the long run than your current mortgage.

To get around these costs, many borrowers who wish to re-jig their home loan opt for zero cost mortgage refinancing. Zero cost, in this case, refers to the way in which closing costs are avoided by actually structuring them into the principal of the loan. Instead of paying a lump sum on closing, the borrower will accept a higher interest rate to compensate.

Now, while this may sound like an attractive offer, you should think long and hard about its effect down the line. If you intend to pay off the mortgage or refinance again within a few years this can be a great way to get around the closing fees. However, if you intend to keep the mortgage until it’s paid off anything up to thirty years away, well you see where this is going. The point or so in additional interest will kill you over a thirty-year period, making these initial closing costs look like pocket change.

The lesson, of course, is this: if you intend to keep hold of the mortgage for more than three years or so you should avoid zero cost mortgage refinancing like the plague. If you know you’ll offload the mortgage before the next President is out of office, I say go for it. It’ll save you cash up front and won’t bite you on the behind in the future.