Why No Cost Refinance Loan Comes With Relatively High Interest Rates |
Posted: July 20, 2017 |
Everything is about costs these days. From our daily budget to our home loans, we worry about costs almost every day. With our economy not at its best, we often find ourselves trying to reduce the costs of almost everything in our lives.This includes the cost of our home loan. Due to the economic downturn, the government has developed several plans and systems to make homeownership affordable. When this happens, even financial institutions and mortgagees are clamoring to appear to be supporting the government’s efforts by proposing the no closing cost refinance options. The name of the program suggests that the loan would be given to the approved applicants and they may not be required to pay the closing costs. When a mortgage or bank offers the no closing cost refinance option, many people are under the impression that they may not have to pay fees or out-of-pocket expenses when they refinance their existing home loans. It may not be a new concept but many people may need to understand the true nature of the no cost refinance loan. In essence, closing costs may still have to be paid. Usually the borrower may have to bear the closing costs but in this case, the lender may have to bear the costs including settlement costs, processing fees, appraisal fees and perhaps even loan origination points. This is why even though it may seem like borrowers may be exempted from having to pay the closing costs, they probably may not know that lenders may simply bundle the closing costs on top of the loan amount. How No Cost Refinance Loan Is Not Good For Borrower?The no cost refinance loan may, however, requires borrowers to bear other mortgage cost such as title insurance, courier fees and also attorney’s fees. However, they may be likely to try to make it appear as if the borrowers are not paying any fees at all.This may be why a no cost refinance loan usually comes with relatively high interest rates. Lenders let borrowers borrow money in a refinance without any additional costs but with higher interest rates in order to cover the costs that they claim to have to bear in the first place. No Cost Refinancing Threats:Over time, the increased interest rate may compensate the lender for paying the closing costs on the borrowers’ behalf. So in theory it may seem as if the bank really is paying for the closing costs but in reality they are merely advancing their own money and borrowers are going to pay them back later in the form of higher interests. Generally, the no-cost mortgage refinancing option may not actually be all that bad. Borrowers may benefit from such refinancing loans if they are not planning to keep their home for long. For instance, if a borrower wishes to refinance simply to cover the financing of remodeling works on his home before he puts the home up for sale in the market, he may actually be able to save a lot of money on the no cost loan. This may be because it may actually take quite some time for the interest rates to accumulate to be enough to cover the costs that the lenders had to bear. If the borrower manages to sell his home before the costs could be covered, he would have saved a lot of money because he really did not have to pay for the closing costs. Bottom Line:The no cost refinancing option may be practiced by many banks. The practice of deceptive marketing may be able to fool consumers to think that they may benefit a lot from this particular type of refinancing loan when in actuality it may be the lender that is going to benefit more. Borrowers may still have to explore their options before making a decision simply because they may save some money initially, they may end up spending more money in the long run.
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