Posted by Lending Club :: June 27, 2008 @ 9:00 am

As someone who is always looking to save money, I was interested in an offer to refinance my mortgage with no closing costs. My suspicious nature picked up on the true cost of the deal, but I fear that others who receive the offer might not be so lucky.

Refinancing your mortgage can save you money in a few ways. The main one is that by lowering the interest rate on your loan, you will end up paying less interest over the life of the refinanced loan than what you have left to pay in interest on your current term. The main obstacles to saving money by refinancing are the closing costs. That’s why I was so excited to see the offer I received for a “No Closing Cost Refi.”

Features of the offer included: no points, no application fees, and no title fees at closing. The benefits of not paying closing costs, such as “keeping more money in your pocket,” were included in the marketing material. Lastly, to try to guilt anyone not already convinced to apply was the headline that seemed to summarize the entire deal: “Pay hundreds, or even thousands, at closing or PAY ZERO – you decide.”

After reading the entire offer, I was nearly convinced about its savings potential. Then I read the fourth asterisk of fine print and the true cost of the deal became clear. By choosing this No Closing Cost refinancing option, instead of all the costs being due at the closing, they are added to the amount that you finance. So if you borrow $100,000 and the closing costs would have been $700, your actual loan amount would be $100,700. There’s nothing inherently wrong with financing closing costs to keep the upfront costs down, but advertising such a program as having no closing costs borders on outright lying. Such an arrangement won’t save you hundreds of dollars; rather, it will actually cost you even more than if you had paid the closing costs at closing. The reason for this is that by rolling closing costs into the financing, they too will be subject to interest over the life of the loan.

To make matters worse, the offer that I received went on to say that by not paying closing costs at closing, you may not qualify for as low an interest rate. So under this scheme, not only would you be stuck with a larger principal balance, but you would also pay at a higher rate! Assuming the $700 cost on a $100,000 refi from above and an interest rate of 6% for the No Closing Cost option, versus 5.5% if closing costs were paid up front, the No Closing Cost option would actually cost you $12,243.98 more over the course of a 30-year term.

Calculating the costs of different options is not difficult, but many people will not take the time to do the calculations. As a result, they may buy into the hype of a low cost deal while failing to realize that it may actually cost them more. Any time you are borrowing money, read all of the terms carefully to ensure that your decision is made on facts as opposed to aggressive marketing.