Mortgage refinancing is a popular financial strategy for millions of homeowners. The most obvious reason homeowners refinance is lower interest rates. When market rates
drop, many run to the bank to get out of their now-uncompetitive loan. Others also refinance to re-extend the term of the loan in order to enjoy lower monthly payments in the short term. But of course those savings need to be weighed against the refinancing fees, which can make the deal look like a breakeven proposition or worse
. Because fees sound so unattractive, some lenders market so-called 'no-fees' refinancing packages, but the offer isn't quite as good as it sounds.
Can you really refinance your mortgage without paying fees?
In a word, no. They say nothing is free, and certainly nothing that requires as many people and as much paperwork as a mortgage. When a mortgage refinance is offered as 'no fees', it really means that you just don't need to come up with the cash to pay the fees. There are dozens of fees that must be paid for any mortgage to get processed, and the cost is definitely, ultimately going to be passed on to you, the consumer.
Common mortgage refinancing fees
The fees for a mortgage refinance are essentially the same as the fees for a first mortgage. A refinancing doesn't really modify the first mortgage; it actually pays off the first mortgage and replaces it with a new one. In some cases, a refinancing may even mean new/additional fees. Here are some of the common costs associated with refinancing:
Inspectors need to make sure your home is really worth it, that the value of the home is not less than the amount of the mortgage
The cost of running your credit and asking for the loan
Loan origination fees.
The cost of actually initiate the loan once you're accepted
A straightforward kickback for the people who arranged the deal
They might not prepare the documents themselves, but they will oversee the proceedings
This reflects the costs of actually compiling the necessary legal documents and preparing the loan papers
This is one that might be new the second time around. It just depends on whether your original (first) mortgage contains a provision penalizing any
early repayment (when you prepay or pay early, the bank loses the profits that would have come from all those years of paying interest).
How no-fees mortgage refinancing really works
As you already know, 'no-fees mortgage refinancing' is actually a misnomer. Every mortgage has fees, and a refinance is actually a new mortgage which buys out the old one. In a 'no-fees' refinancing, the fees are baked into the product in one of two ways:
Under this method, the mortgage fees are rolled into the loan and become part of the principal, increasing the size of the loan by the amount of the fees
Under this method, the lender offers an interest rate which is slightly higher than the best rate a borrower qualifies for, and that extra interest becomes profit which offsets the cost of the lender fronting the fees on behalf of the borrower.