Pros and Cons of No-Closing-Cost Loans

I've been shopping around to refinance my mortgage and keep seeing companies that offer loans with no closing costs. That sounds like a great deal -- but is it too good to be true?

Those loans are worth looking into, but you need to ask a lot of questions. No closing costs usually doesn't really mean you won't have to pay any money at closing. Instead, it usually means that there aren't any lender fees, but you'll still have to pay for title insurance, a title search, appraisal, credit check and other charges. Ask the lender for a good faith estimate, which will list all of the fees they expect to charge. The exact numbers can change before closing, but at least you'll see what charges you'll still need to pay.

Lenders that offer low fees often make up the difference by charging a higher interest rate. So you need to look at all three parts of the equation: interest rate, fees and points. Paying low fees can be most valuable if you plan to keep the loan only for a short period of time; a low interest rate is the most important if you expect to keep the house for a while. Some lenders will let you add your closing costs to your loan balance if your cash is low. E-Loan, for example, can give you a little extra cash back for closing in return for a higher interest rate, or a lower rate and no cash back for closing. Run your numbers through our Which Lender Has the Better Loan? calculator to see which offer works best for you.

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Be sure to compare several offers. You can search for the best rates in your area at Bankrate.com. If the lender has a great rate but is charging high fees, see what you can negotiate. The lender is more likely to cut you a deal if you have a good credit score or are taking out a large loan. And be sure to contact your current mortgage company, which may offer to match the competition to keep your business. You also may get a break on some of the closing costs, especially if they can use your old appraisal (usually only if it's no more than six months old) and offer you a reissue rate on your title insurance, which can save you a few hundred dollars.

For more information about the rights you have as a home buyer and borrower, including the types of fees that lenders can charge, see the U.S. Department of Housing and Urban Development's Web site, especially the section about settlement costs and information.