By Lionel Valdellon
When refinancing your home, you can choose to go with a "no closing cost" option - this is where you opt to let the lender pay for the non-recurring closing costs such as processing and underwriting fees, appraisal fees, title/escrow fees and more. Items that cannot be included are property taxes, interest, and insurance.
Keep in mind that choosing no closing costs may actually raise your monthly mortgage. You'll pay a slightly higher rate, so this option only favors the borrower if the prevailing market rate is lower than the borrower's existing rate. Borrowers should also be knowledgeable of yield spread premium (YSP). The YSP is cash that a mortgage broker receives for directing borrowers toward a particular home loan with a higher interest rate in exchange for lower upfront costs. No closing costs can sometimes mean the borrower overpays for the loan received eventually.
Rolling closing costs into the loan isn't always the best option. Remember to keep these three points in mind when shopping for your next loan:
1. Borrowers might forget the true value of the loan.
Human psychology often gives little value to what appears to be 'free.' The more we pay for something, the more perceived value it has for us. Having no closing costs may lead us to believe (falsely) that we got something for nothing.
2. Borrowers may not take pains to understand all the associated costs.
Don't we double check everything on an expensive purchase? Borrowers who pay closing costs out of pocked will likely go through the loan bit by bit to understand the fine details.
3. Paying cash allows better negotiation.
Buyers can often better negotiate for a good loan when paying cash for some portion of the loan. Having no closing costs could mean you have less leverage with the lender.
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