Every refinancing boom is unique in its way, with different costs and different
opportunities.
The bigger question for refinancers this year is the costs they'll incur. All around the
country, more and more lenders are pushing "no closing cost" loans. As the name implies,
these deals don't have an appraisal fee. Or a "document" fee. Or even points -- a percentage
of the loan you ordinarily have to pay up front. You can just show up at the closing and
sign on the dotted line; your out-of-pocket fees are zero -- a nice break, given that the
costs on a $200,000 loan may run $5,000 or more, HSH Associates reports. "No-cost loans now
make up about 40% of our refinancing loan business," says Countrywide's Anderson. "Since
they were introduced during the last refinancing boom, people have become more aware
of them and comfortable with them."
Great as no-cost loans may sound, though, there is one drawback: To get one, you'll usually
have to pay an interest rate that's about 1/2 or 5/8 of a percentage point higher than the
"full cost" rate.
So which one should you choose -- a no-cost loan with a slightly higher rate or a regular
loan with a lower rate? The answer largely depends on how much you're looking at in expenses
and how long you're going to stay in the house. (Taxes, you might be surprised to hear,
don't really play into the decision all that much. Although you can immediately deduct the
points you pay on a first mortgage, on a refinance you can't; you have to spread the
deduction out over the life of the loan.) A homeowner with a $200,000 mortgage and $5,000
in closing costs, for example, would have to live in his house for 117 months -- nearly 10
years -- in order to recover his up-front costs, if he chooses a 7% rate rather than a
no-cost loan at 7.5%. If you were this homeowner and felt confident you'd be in your home a
decade from now, then it would make sense to go with the lower rate. But if your plans were
less certain, you'd be better off paying the higher rate and rolling your costs into your
new loan.