It Isn’t Always Expensive or Only For Long-Term Homeowners

Many homebuyers might hear "closing costs" and shrink away from refinancing altogether. Or maybe a homebuyer plans to move in five years and assumes it’s a stupid idea to refinance, because he won't ever break even. That’s not necessarily true if you can find the right loan.

The trick is to look for a loan that rolls the closing costs into it or settle for a higher interest rate for a rebate to reduce or eliminate closing costs.

“A general rule of thumb is that a change in rate of 0.125% will change the points or rebate by 0.5 percent,” says Parsons.

So if you have $3,500 in closing costs on a $350,000 refinance with an interest rate of 4%, you could be able to accept a higher interest rate of 4.25% and receive a 1% rebate of $3,500, wiping out your closing costs.

“This kind of scenario, sometimes called a ‘no cost refinance,’ can make sense where the borrower intends to have the loan for a comparatively short time—less than three or four years," says Parsons. "They reduce their rate and save money without incurring any costs paid out of pocket or added to the loan. In a scenario like this, any reduction in the rate results in a net gain to the borrower.”