• Check with your lender about a no-cost mortgage.sign here please image by jodi mcgee from Fotolia.com
  
  A no-cost mortgage may be created for a number of reasons, all of which are designed to help a homeowner by refinancing a mortgage. In a no-cost refinance, little or no actual costs are charged on the closing statement (HUD1). It's not that the costs involved in refinancing are not charged. The costs involved are totaled, then divided by the loan balance to determine the percentage of the loan amount that is needed. The lender then looks at price sheets and determines the rate by the percentage of rebate that is needed to "soak up" those costs. The lender must "buy up" the interest rate to create this rebate, so the interest rate offered to the borrower will be somewhat higher. If this rate is still lower than the borrower's current interest rate, then it is worth it to refinance. This can be done with purchase mortgages also, but it is not common.
  
  

Equity savings

• One big advantage to a no-cost refinance mortgage is that the costs of the closing charges are not derived from the equity in the home. Since most refinances have closing costs rolled into the new loan, the new loan amount would increase. If it looks as if your appraised value is not as high as you had hoped, you may still be able to refinance and improve your interest rate.
  
  

Stabilize the payment with a fixed rate

• If you currently have an adjustable-rate mortgage (ARM) and have noticed that fixed rates are low, you might be able to refinance to a fixed-rate loan by taking a no-cost mortgage. Your fixed rate won't be as low as it would be if you paid closing costs out-of-pocket (or rolled them into the new loan), but doing this refinance will stop your ARM loan from continuously increasing by stabilizing your interest rate.
  
  

Decrease payments

• There is a big advantage to using a no-cost refinance if you took out a subprime (bad-credit) loan a few years ago. You might have experienced rate increases as you emerged from your fixed period (but were still working on your credit scores). Call your favorite mortgage broker and discuss rates and your current balance. He or she will discuss current credit requirements and help you to determine values in your neighborhood, so you will know what your options are.
  
  

Reduce out-of-pocket costs

• One of the biggest advantages to a no-cost mortgage is that the costs are "soaked up" by the rate increase (usually up to half of 1 percent in the interest rate), and are provided for you at the closing. If your intentions were to split closing costs, paying some out-of-pocket, you may be able to hit your target by easing down the expense of closing costs into something more affordable. If this allows you to decrease your payment and make your life more manageable, it is still a win-win situation.