Keep in mind that while refinancing can save you money over the long term, the process itself is never free — no matter what your broker says. These days, "no-cost refis" are very popular, and it's easy to see why. The appeal of them is that you don't have to pay out of pocket for the fees typically associated with these loans, such as the application fee, title search, credit check and appraisal, which can easily total more than $1,000. You also wouldn't have to pay any points, which is also known as the loan-origination fee. A point is one percentage point of your loan amount, and the more points you pay up front, the lower your interest rate will be.
"There's no such thing as a true no-cost refi," says HSH Associates' Gumbinger. "You're trading off paying out-of-pocket expenditure in exchange for either a higher loan balance or a higher interest rate." Typically you'll pay an additional one-half to five-eighths of a percentage point more for the privilege.
Whether a no-cost refi is the way to go depends on a couple of factors. For starters, if you don't have ready cash to pay the fees and if the rate you can get even with the no-cost premium is significantly lower than what you're paying now (and you're not required to take out a higher loan), then go for it.
But assuming you have the money to pay for refinancing, then you need to consider how long you'll be in the house, says Fenley. If you're planning on moving fairly soon, the no-cost refi might well make sense. Consider this: A homeowner with a $250,000 mortgage and $4,000 in closing costs would have to live in her home for about four-and-a-half years to recoup her upfront costs if she chooses a 7.5 percent rate vs. an 8 percent no-cost refi. If she couldn't be sure that she would be around for that long, the no-cost refi would indeed be a better way to go.
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