Watch Related Videos
comments
Many homeowners elect to pursue a no cash-out refinance at some point. While this loan can be beneficial, there are a few potentially negative consequences that you will need to be aware of. Here are the basics of the no cash-out refinance and how it works.
No Cash-Out Refinance
Typically, this type of mortgage is pursued in order to lower your monthly payment and it to take advantage of a lower interest rate. For example, let's say that you have a $100,000 mortgage balance left on your house. You originally had a 30 year mortgage and you have paid on your mortgage for 15 years. By refinancing, you will be able to get a 30 year mortgage and extend that $100,000 balance over 30 years instead of 15. Many people also choose to do this when interest rates are low so that they can make their payment even smaller.
Closing Costs
Even though this type of loan can be very practical in certain situations, you are going to want to consider the impact of closing costs. Closing costs on a typical mortgage are going to cost you somewhere between $4000 and $6000. These costs are going to include title insurance, appraisal fees, points, and origination fees. You are going to have to either pay for these out of your own pocket or finance them into the amount of the loan. If you finance them into the loan, you are going to essentially be increasing your mortgage balance by $4000 to $6000.
Increasing the Interest Paid
The biggest problem with this type of mortgage is that you are going to be substantially increasing the amount of interest that you pay over the life of the loan. Many people are confused by this factor because they are actually taking a lower interest rate on their mortgage. However, you are potentially going to be drastically increasing the term of the loan. The longer that you are going to be borrowing money, the more interest you are going to have to pay overall. When you take a loan that has only 15 years worth of payments left and spread out to 30 years, you are going to be adding many payments. Every time that you have a payment, they are going to calculate interest on the balance remaining.
Over the course of a 30 year loan, you are typically going to pay for your house twice. You are going to pay for the original purchase price and the interest is going to add up to approximately the purchase price or more. Therefore, you need to be aware of the negative impact of your decision with this type of loan. Even though you are going to be making your monthly budget more affordable and lowering the interest rate, you are going to be increasing the amount of interest that is paid over your lifetime. When you look at the big picture, it may not make sense for you to do this.
