4 Reasons to Do a No-Cost Refinance

A no-cost refinance is a loan modification carried out directly through your existing lender. Refinancing typically means one of two things: one, to extend a loan to receive lower monthly payments or, two, to shorten a loan to receive lower interest rates. In both scenarios, the goal is to adjust a loan to your current financial means. There are a number of good reasons to pursue this option. 

#1 Avoid Default

The best reason to pursue a refinance option is to avoid default on your loan. This is a good because the lender will be much more likely to work with you to do the modification at no cost under these conditions. In this case, you will likely be looking to extend the loan over a longer period of time. You will likely face a slightly higher interest rate in doing so. Even at this higher rate, however, your monthly payments will drop. If you are nearing default on a loan because you can no longer afford payments at your current income, contact your lender to ask for a no-cost refinance.

#2 Capitalize on Lower Interest Rates

You may find the market has changed significantly since you took your loan. If the national prime rate has dropped more than a point or two, you will be able to get a better deal on a loan today. Instead of going out to source a new mortgage to pay off your existing mortgage, consider attempting a direct refinance with your lender. If possible, shorten the terms of your loan contract. This will help you get not only the lower market rate but an additional reduction. While lenders may be hesitant to help you with these savings, they would prefer to refinance directly than to have you prepay the loan with the help of an outside source.

#3 Get Out of an Upside-Down Loan

An upside-down loan is one in which you owe more on the mortgage than your property is currently worth. This typically occurs in response to a recession, and this means interest rates may have dropped with the falling home prices. Not all lenders will be willing to help you address this issue by refinancing your loan. However, you may be able to at least partly mitigate your losses by refinancing to a lower interest rate, even if you cannot adjust for the home's current low value. Where possible, also look to shorten loan terms, as this will help you recover equity in the home faster.

#4 Minimize Expense

Ultimately, all of the reasons to do a no-cost refinance involve saving money. Even when you are refinancing to a more expensive interest rate to avoid default, you are still saving money over the alternative of defaulting. Considering the expense of a refinance option is critical. When you refinance from an outside source, you may find the expense is actually greater than the savings in the long run. This occurs because of prepayment fees and credit penalties. Try a no-cost option directly with your lender before pursuing a third-party refinance.