Can you refinance without paying the closing costs out of pocket? Maybe. It depends on how much equity you’ve built and which loan programs your loan officer can offer. In today’s fast-appreciating real estate market, no-closing cost loans are a possibility for many borrowers. Quick appreciation means additional equity for homeowners. According to the National Association of Realtors’ data for the second quarter of 2021, the national average home price is up nearly 23% over the previous year. That could mean big gains for individual homeowners! If your home’s value has appreciated, and if you’ve paid your mortgage on time, you may have enough equity to qualify for a refinance loan without upfront closing costs.
Why Do Homeowners Refinance?
A home loan refinance is a restructuring of the debt for which your property serves as collateral. Some homeowners refinance to lower their interest rate. If the market rate has declined since you obtained your existing loan, this may be an option for you. Some borrowers can even lower their rate in a steady or upward-trending rate environment. A lower mortgage rate may be possible regardless of the current trend if your credit or other underwiring considerations have improved since your last approval. Also, if your home has appreciated, you may qualify for a lower rate based on the updated loan-to-value ratio on your application.
Homeowners also refinance to pay off other debts. If you have credit cards, installment loans, student loans, collections, or other debts with higher interest rates, then an increased mortgage might be a smart financial choice. If choosing to tap into your home’s equity to pay off other debts, consider the alternatives carefully. A lower rate, lower payments, and shorter payoff window are all good reasons to utilize home equity for a debt paydown. If you’re considering refinancing for this reason, discuss your overall financial picture and goals with your loan officer and also with your financial planner.
Sometimes, borrowers refinance a home loan to obtain cash. This is a decision that should be carefully calculated. Cash from home equity is sometimes used for the purchase of an investment or to start a business but should be thoughtfully considered before proceeding.
A less common reason for refinancing is to remove one or more parties to the original loan. This situation could arise as the result of a divorce or when a non-occupant borrower is no longer needed for loan approval.
Eligible Loan Products
Rate/Term Refinance – If your goal is to get a better interest rate and/or lower monthly payment, then you might opt for a rate/term refinance. This type of refinance is common when interest rates are low and trending downward. Closing costs can be rolled into this type of loan.
Cashout Refinance – If your goal is to tap into your home’s equity to pay-off other debts, your loan officer may offer to discuss cashout refinance loans. A cashout refinance can accommodate closing costs within the loan amount, provided that the debts you pay-off do not exceed the loan-to-value maximum limit on your loan product.
FHA Streamline Refinance – An FHA streamline refinance aims to keep closing costs low. Those costs can be paid out of your loan proceeds. If you currently have an FHA mortgage and want to lower your rate, talk with your loan officer about a streamline refinance.
VA Streamline Refinance (a.k.a. IRRRL) – A VA streamline refinance is an option for Veterans or their spouse/children who currently live in a home purchased with a VA loan. The official name for a VA streamline is Interest Rate Reduction Refinancing Loan (IRRRL).
HELOC – A home equity line of credit (HELOC) may be an option if you apply with good credit and a substantial amount of equity. HELOC’s are different from the other products discussed here because they offer an open-ended line of credit. Your home is still the collateral for the loan, but as the borrower you have more flexibility regarding when and how much to borrow. This also gives you some control over the monthly payment. The interest rate on this type of home loan can be higher than for a closed-end refinance, so discuss both options with your loan officer before committing.
Typical Closing Costs
Some of the closing costs a borrower can expect on a refinance are title insurance, a title service fee, recording fees, document prep fees, and underwriting fee, government recording charges, and any necessary processing fee charged by the lender. The total for these fees can vary and may come in at around $1,000 for the basics. If an appraisal is needed, it will probably cost around $400 and a survey would also cost around $400. (Surveys are not usually required for a refinance.)
How To Get Approved
Visit a Ruoff branch or apply online. Either way, the process follows the same basic steps. First, there will be questions. Your loan officer will present you with the uniform application that all mortgage borrowers fill out. Your lender and underwriting team need to know about your current and former housing, employment status, income, assets, and credit history. Your loan officer will also ask about the condition of your home and may request an updated appraisal. Some refinance loans do not require an appraisal. If the real estate market in your area has appreciated and if you’ve built known equity in your home, you may be approved based on your home’s assumed value.
You will be asked to provide documentation to support the information you disclose on the loan application. Different loan products have different requirements. Once you’re approved, you can choose if and when to lock-in your interest rate. A closing will be scheduled, giving you enough time to collect documentation and giving the lender enough time to verify information before the final approval is granted.
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