There have been times when I have gone on a listing, and while chatting with the sellers about the in's and out's of marketing their home, sometimes they get around to telling me that they recently refinanced.
My first reaction is usually to "cringe!"
Now why would I do that ? Well... most of the time they tell me that they were able to lower their payment by several hundred dollars because of the refinance. It is then that I ask them the question that usually tells the tale...
Gee, Mr and Mrs Seller... what was your loan amount before you refinance ? Oh... $235,000. Ok... and did you have to pay any "closing costs" when you refinanced ?"
Oh no... we refinanced with "no cash out of pocket." Our loan officer told us we could roll the closing costs into the mortgage... so "it didn't cost us a thing !"
My next question is always... "So, how much were the closing costs ? How much did you 'roll in' to the new loan ?
"Well... the closing costs came to about three percent of the loan amount, and then we paid two more 'points' to get an even lower rate. So... our total closing costs were about $13,000. But, that was ok... we rolled it into the new loan.
Of course, I asked them what the new loan amount was. They said... oh... it comes to $248,000 all together, but our monthly payment is still over $200 a month lower than it was before.
It was my hurtful task to gently tell them that they just pretty much wasted that Thirteen Thousand Dollars.
First of all... I never recommend refinancing unless the "spread" between the previous rate, and the new rate is more than 2 percent. This way, instead of rolling in the closing costs, the lender can "buy up" the rate rather than "buy it down". Doing that creates a "credit" which can usually pay for most of, if not all of the closing costs for the new loan.
Recapping... here are the two choices... 1) Roll in closing costs and extra points so that the rate is the lowest and the out-of pocket is zero... or 2) pay no points, and perhaps "buy up" the rate by a 1/4 to 1/2 %... which creates a credit which takes care of the closing costs. The second way leaves the seller with exactly the same mortgage amount as before, and also with a lower monthly payment... just not quite as low as with the first method.
In doing that... if things change, and the owner suddenly has a need to sell... he or she has not painted themselves into a "money corner" they cannot get out of.
As is usually the case... the best thing for the seller to do when contemplating refinancing depends on their individual situation. Sometimes it makes sense to roll in costs and points, but most of the time it's not the best alternative.