What is a no Closing Cost Rate/Term Refinance?

A no closing cost rate/term refinance is when the lender gives a credit at closing to offset any closing costs.  In a no closing cost refinance, the borrower will agree to take a higher interest rate in exchange for this lender credit.  The lender will make up over the course of the loan through the collection of higher interest associated with the increased rate.  Eliminating closing costs, while costing the borrower more money over the life of the loan, ensures that there is an immediate benefit to the refinance if the interest rate is lowered over the original loan.  No closing cost refinances are particularly popular in situations where the plan is to sell the property or pay off the loan in a few years.  As there are no closing costs to recoup, the refinance leads to immediate savings.  Typically a .25% increase in interest rate will equate to a credit equal to 1% of the loan balance.  For Example:

• Your debt consolidation refinance on a Florida property has a new loan amount of $200,000.
• The interest rate offered is 3.5%
• Your closing costs are $4,000
• Your lender offers to pay $2,000 of your closing costs in exchange for you agreeing to accept an interest rate of 3.75%
• Your lender offers to pay $4,000 of your closing costs in exchange for your agreeing to accept an interest rate of 4%.

When you negotiate a higher interest rate in exchange for a lender credit to your closing costs this is referred to as “Buying up the interest rate”.  If you plan on holding the loan for a short period of time, this can be an excellent way to ensure that the benefits of the refinance are not eroded away by the transaction costs.

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