As mortgage rates continue to drop, many people who have not yet refinanced worry that they may not be able to lock in one of these low rates. They continue to hold off on refinancing because they do not have the funds to pay the closing costs. A no-cost refinance, though, would allow these homeowners to refinance without putting any money into closing costs or a down payment. This would allow them to lock in a new low rate without worrying about their current budget.
A no-cost refinance works by rolling the costs of closing into the overall loan amount. This often means the homeowner will agree to a slightly higher interest rate so the lender is able to cover the costs associated with the closing. The refinance is not completely cost-free, of course, but a portion of the costs will be covered by credit that the lender offers to the borrower, while the homeowner will pay the rest of the costs out over the life of the loan, through a higher interest rate.
Some borrowers worry that the higher interest rate will be too high to save them any money. The fact is that what is considered a high rate today is lower than the low rate of several years ago. Unless the mortgage being refinanced is only a few years old, the rate is bound to be lower. Often, it will be substantially lower. Applicants with a low loan balance may still have to pay some costs, but may qualify for reduced closing costs.