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Just the opposite of paying points; by paying points you buy the interest down. On the contrary if you do not closing costs lenders get something called the yield spread premium (YSP) to finance your loan. They use these funds to do the underwriting and sundry and quickly make some happy adjustments to your interest rates.
You can reduce the crazy upfront fees that usually come with a refinance. If the interest rates have gone down significantly it will work to your favor. For instance, if your previous mortgage was a nine percent and your new loan is at seven percent, avoiding the closing costs may increase your interest rate by a quarter of a percent point. But, it will make sure you start reaping the benefits of the difference in rates of interest immediately.
So, what do the closing costs include? This is what:
Lender’s Title Insurance Costs
Survey Fees
Attorney’s Fees
Appraisal Fees
Credit Report
Document Preparation
Underwriting Fees
When you go for a no closing cost refinance, you are provided with a full ‘HUD 1’ settlement statement showing the lender credit for all these closing costs. While you can write most of these costs to the lender you will have to take care of three:
Escrow fees which become mandatory if the loan to value ratio of your loan is more than eighty percent, however if the LTV is less than eighty percent escrow fees can also be waived.
Often when the lender appoints a third party appraiser to get an estimate of the value of your property, you are required to pay the appraiser’s fees. These charges are refundable during closing transactions.
You would be required to give some money toward the first interest payment.
A no-closing costs refinance can be a good way to avoid private mortgage insurance. If with the addition of closing costs your loan to value ratio is going over eighty percent, don’t think twice, going for a no-closing cost refinance can amend your situation.
Given all its benefits, a no-closing cost refinance adds to the principal amount of your loan. If you plan to stay in the house for long enough, the decision may be prudent. However, if you’re refinancing just to get rid of your mortgage quickly you may want to pay the closing costs.
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