Best Answer: Closing Costs (or the cost of refinancing)
First, I'd like to debunk the notion of "No Closing Costs", heavily advertised by national marketers and banks. Have you ever heard the expression "There's no such thing as a Free Lunch?". All things in this world have costs to produce, and if you know anything about the companies that produce things, you'll agree that they do their darndest not to pay for them themselves. The cost of originating or refinancing a mortgage average anywhere from 2% to 5% of the balance of the loan, depending largely on geographic location, property type, value of the property, amount of the loan, and of course credit score. Many banks try to foster a notion that they somehow "care" about their customers so they will somehow magically absorb these costs, telling you that they make their money back over the years as you pay interest on the loan, but as a matter of fact the overwhelming majority of mortgages in the USA are sold from one bank to another bank, a servicer or even to Wall Street investors within the first few years of origination. This is so the lender can get more money to write more loans. They don't have them long enough to make back the costs of closing. For a breakdown of closing costs and how they are paid for (even in "Zero Closing Costs" promotions) have a look at the source http://refinanceone.net/wordpress/2007/0.
Once you've reviewed the typical closing costs associated with a mortgage, it's time to consider how to pay for them. In a nutshell, costs can be paid in cash at closing, rolled into the loan so there's no out of pocket cost, or paid for by accepting a higher rate than you would qualify for otherwise. More information is available at the same source: http://refinanceone.net/wordpress/2007/0.
Once you've decided what your
goals are, the reasons you wish to refinance, then it's time to weigh them against the costs. Many borrowers try to compare closing costs alone, however as we know that closing costs can be packaged in many different ways, this is generally ineffective. Because most people who refinance are doing so to lower their total monthly payments, either by changing the type of loan or paying off debts, and in many cases trying to convert their adjustable rate mortgages to a fixed rate mortgage, a more holistic approach is to compare monthly payments across your total monthly spending, with the closing costs rolled in to either the balance of the loan or into a higher rate. To see examples, see source. http://refinanceone.net/wordpress/2007/0.
All loans costs money to originate and refinance, even if it's not always clear how you may be paying for them. Most of the time it's better to roll your closing costs into your loan, so that there is no out of pocket expense to you and the rate doesn't have to be increased. Always remember to see if the loan achieves your goals first, and don't put too much stock in the Good Faith Estimates you receive while shopping around, because people, whether broker or bank, are more than willing to lie to you to beat out their competition initially, so they can lock you into a process which you cannot easily reverse. My recommendation is to speak with as many people as you can, but evaluate them on the basis of trust. You may find that the person who gives you the highest quote may be the only one telling you the truth. This is not a simple subject to discuss, and while we have tried to treat the subject thoroughly, a consultation with a refinancing specialist would be the best way to get answers specific to your situation.