No Cost Refinance Deals

In a tight economy, a "no cost" refinance deal sounds like just the thing to improve your cash flow. However, a "no cost" refinance doesn't necessarily mean you automatically benefit from the deal. In fact, depending on your situation, a no cost refinance might actually cost you more in the long run than doing nothing at all. Understanding the motives behind your refinancing deal and looking at the long term savings potential of refinancing can help you discover the right home loan for your situation.

How "No Cost" Refinancing Deals Could Cost You
"No cost" refinancing refers to a practice in which a mortgage lender or broker covers the closing costs on your home loan. Since home loans typically require as much as 3% of the principal paid out as closing costs, this kind of deal sounds great on paper. The only catch is that you will pay a higher interest rate on your mortgage than you would if you had covered those costs yourself.

Put another way, paying closing costs now means you'll pay less in interest over the life of your home loan. When mortgage lenders front those costs on your behalf, they expect to earn back that outlay and profit on it during the course of your repayment. Ethical home refinance specialists calculate "yield spreads" that allow them to earn those closing costs back over a reasonable term. However, personal finance experts warn prospective refinance customers to avoid predatory lenders that push no cost refinance deals with unfavorable terms--that's why shoppong different lenders is important. In the interest of remainingf competitive, most lenders will offer you a fair deal.

When "No Cost" Refinance Deals Make Sense
You can justify the added interest expense of a no cost refinance deal in a handful of situations:

• Your can better your financial siituation with a refinance but don't want to short your emergency funds by paying the costs out of pocket. In fact, about 85% of those refinancing choose this route.
• You intend to use proceeds from a cash-out refinance to make home renovations that will substantially increase the value of your property.
• You don't plan to keep the loan long enough to recoup the costs throgh the lower rate; then it makes sense to accept a higher one with no costs as long as it improves your financial picture.

Remember that shopping for the best refinance rates online can help you discover whether you might find a better deal through a lender that minimizes your closing costs. If you decide that a no cost refinance deal is right for you, requesting multiple quotes helps ensure that you get a fair deal that meets your financial goals.

About the Author:
Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.