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Low Refinancing Rates with No Closing Costs?

By Nathaniel Hutchinson Business and Financial Expert


The housing market remains stagnant, despite incredibly low mortgage rates and property prices which have created a veritable paradise for buyers looking for good deals. On the other hand, the refi business is booming, as people try to take advantage of affordable rates before they inevitably ascend. With so many lenders competing for refi business, some are claiming to provide deals that feature low refinancing rates with no closing costs. But are these plans too good to be true?

Low refinancing rates make closing costs more affordable

Freddie Mac's most recent figures indicate that average mortgage and refinancing rates remain near record lows. The federally-backed mortgage company estimated national averages for 30-year fixed mortgages rates at 4 percent, with 15-year rates at 3.30 percent and hybrid adjustable-rate mortgages at 2.91 percent.

According to Freddie Mac VP and chief economist, Frank Nothaft, low rates have resulted in widespread home affordability which led to a 1.4 percent increase in recent home sales; however, the real estate market remains sluggish due to the struggling economy and strict lending practices which have prevented many prospective buyers from becoming homeowners.

What the low rates have done is make refinancing more affordable, which in turn has freed up money for homeowners to use on closing costs. On the other hand, if you donít have the money upfront, you can't refi your home in the first place unless you are able to acquire a refi loan requiring no closing costs.

Are there really no closing costs?

When lenders provide a refi loan, it costs them money. Invariably, to offset these costs, they pass the burden on to the buyer in the form of closing costs. In certain situations, a bank may want to work with a homeowner even if he or she doesn't have any upfront money to cover these costs. To do this, the lender will lure the homeowner in by offering a refi loan without closing costs.

This may be a good deal for homeowners without the liquid cash needed to cover pricey upfront costs; however, the homeowner can expect higher refinancing rates with no closing costs loans, because the lender will need to get more money somewhere to make the refi loan profitable. In certain situations, the lender may also suggest a second mortgage to help pay for the closing costs. While not truly a no closing cost loan, this does prevent the borrower from having to provide upfront cash.

Is it a good deal?

For some people, this type of loan is a great deal, because it allows them to do something they wouldn't ordinarily be able to do; however, it will only save them money if their new rates are better than their old ones or if the new loan will allow them to pay the property off at a faster rate. To know if this type of borrowing strategy is right for you, talk with several lenders and compare rates to see if you can get a good enough deal to make it worth your while.

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