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The Real McCoy: What is ‘no-cost’ refinancing all about?

By: Kari McCoy
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Dear Kari, I was talking with my neighbor and he said he just refinanced his home loan and it did not cost him anything. He suggested I do the same. Is that true? Answer: As the old saying goes, “There is no free lunch.” Before you consider refinancing your home loan, it would be wise to understand all that refinancing involves. When the refinancing takes place, you pay off your existing mortgage and create a new one. You may even decide to combine a first mortgage and a second mortgage into a new loan. Please note if you are refinancing from one adjustable rate mortgage (ARM) to another, check the initial rate and the fully indexed rate. Plus, be sure to ask about the rate adjustment you might face over the term of the loan. What is a “cash out” refinance? When you refinance from an amount greater than what you owe on your home, you can receive the difference in cash. This is referred to as a cash-out refinance. Are you eligible to refinance? Your lender will consider many facts such as your income, assets, credit score and the current value of the property. All that is then weighed against the loan amount you are applying for. What will the refinance cost? Average would be 3 percent of the outstanding principal in refinancing fees and maybe more if there are prepayment penalties or other costs for paying off any mortgages you may have. What other fees might be charged? First there is the application fee (usually includes your credit score check), which typically varies from $200 to $450. Then there is the loan-origination fee charged by the lender, with the cost up to about 1.5 percent of the loan principal. There is a fee for an appraisal of your home in order to help the bank feel comfortable with the loan amount. The lender may also require a termite and pest control inspection (up to $400), inspection fee (up to $700) and homeowner’s insurance (up to $1,600). Title search and title insurance, which cover the cost of searching the property records to ensure the rightful owner and to check for liens and check for errors, may range from $700 to $2,000. What are points? One point is equal to 1 percent of the amount of your mortgage loan. There are two kinds of points. First are loan-discount points, a onetime charge paid to reduce the interest rate of your loan. The second are points some lenders charge to earn money on the loan. What is “no-cost” refinancing? Basically, there are two ways to avoid paying up-front fees. One way is the lender covers the loan costs, but charges you a higher interest rate. The other way is when the refinancing fees are included in the financing of your loan.