Lucy was confused, she had a large number of bills that she needed to pay, and she wanted to borrow a refinance loan as well. The only problem was that she did not have enough money to pay off the closing cost of the loan. She walked into the lender's office, where she saw an advertisement, and heaved a sigh of relief...
What Lucy saw was basically an advertisement for a refinance loan with no closing cost. Such schemes are very rare, and have strict and stringent qualifying terms. You may have come across many advertisements that promise a no closing cost or closing cost-free refinance. Here, I have attempted to explain the concept and functioning of such financing schemes.
What is Refinance?
Refinancing loans are mostly applicable to mortgages. However, it must be noted that these are also used in case of other loans. In cases when borrowers find themselves in financial distress, they can apply for this scheme, as the application process for it is fairly simple. Once it is sanctioned, all the debts, including mortgages and home improvement loans against the applicant's collateral are repaid by the lender. Then the borrower repays the lender in installments that are small in amount and have a low rate of interest. This process is somewhat similar to debt consolidation.
How Does Closing Cost-Free Refinance Work?
Refinancing loans may be easy to borrow, but there are several expenditures that are involved in the process. The borrower is expected to pay what is often known as a 'closing cost'. This is basically the processing charge for various aspects of the application process, such as, stamp duty, appraisal fees, inspection fees, etc. In addition to that, the borrower has to pay for taxes and attorney charges. Local authorities also charge the borrower with a particular amount of fee, when the lien for the property is transferred to the lender.
The specialty of such loans, as the name suggests, is that there is no closing cost that has to be incurred by the borrower at the time of borrowing. This amount is initially taken up by the lender, and recovered later by either adding the amount to the loan principal, or increasing the interest rate. There are several factors that are considered by the lender before approving this type of loan; an excellent credit history, good job security, and excellent academic and educational merits are some of the common ones. Further, he may also consider the mortgage projection of the property that is to be refinanced.
There are some small points that you need to consider while availing this scheme. Firstly, you need to make sure that you get the agreement between you and your lender right. Secondly, you need to have a careful look at the overview of the agreement. Lastly, make sure that you abide by the installment schedule, as even a single missed/late installment is bound to bring down your credit rating and score.