What does no-cost loan refinancing cost you

What does no-cost loan refinancing cost you?

If you are shopping for a loan modification or home mortgage refinance you have probably heard of no-cost mortgages and loan modification. If you have done some research into loan modifications and mortgage mods you know that they are far from free, in fact a good rule of thumb for loan modifications fees and costs is anything from 3 to 5 percent of the outstanding principal (money you still owe) on your loan.

So how can lenders and banks offer no-cost loan refinance? Well as you probably guessed lenders have their own definition of no cost. In fact the exact definition can change from lender to lender so it is a good idea to ask the salesperson or customer care assistant what they specifically mean by no cost.

In any case you can be confident that lenders don’t mean they are going to waiver all the fees and pay for you to get your loan modification. No-cost mortgages refer to an arrangement between the lender and borrower to avoid paying any up-front fees for the mortgage refinance or loan modification by paying the fees in the future. No cost loans are like icebergs, most of the cost, in fact more than you would ever expect, is hidden. There are two main no cost loan options lenders offer:

No fees but a higher interest.
In this option the lender offers to cover all the expenses related with the mortgage with the condition that the borrower accepts a higher rate of interest. The higher rate of interest will be charged during the whole lifetime of the mortgage. It is important that you ask for detailed estimates of the real costs of this no-cost alternative. This estimate should show the cost of the mortgage fees and how much extra interest you will be paying with the higher rate of interest.

Taking a loan to pay the loan fees.
This option of no-cost loan modification actually involves taking on a loan to pay for a loan, or at least the loan fees. With this option the lender covers the mortgage modification fees but includes the fees as part of the loan. This will mean the borrower will have to pay for the fees with interest as part of their modified mortgage. Again it is important to understand what the real costs of your no-cost mortgage modification will be. Ask for an estimate that details the real cost of your mortgage fees after paying interest on them for the length of the loan.

Lenders will often try to include a prepayment penalty clause in the mortgage or loan contract to discourage borrowers from changing loans in the early years of the modified loan. As far as you can you should try to avoid or reduce this penalty as they will reduce flexibility when trying to find a better deal in the future.