A no closing cost refinance sounds like a great idea, however what most lenders fail to disclose is that the money you save upfront is being collected on the back in what's called Yield Spread Premium (YSP).

Yield Spread Premiums are the cash that a mortgage company receives for steering a borrower into a home loan with a higher interest rate.

For example, if the going rate from a Lender is 6.00% for a standard refinance, a 'no closing cost' refinance will typically come with a rate significantly higher than 6.00%. The higher the rate is over 6.00%, the more YSP the lender will make to cover the upfront fees associated with your loan.

YSP must be disclosed, with the exception of banks & most credit unions, but typically not until you've received the final settlement papers at closing.

In most cases, a 'no closing cost' refinance will end up costing you more in interest rate charges than you would have paid if you financed the upfront fees.

The only time a 'no closing cost' refinance may make financial sense is if you are certain you don't intend on owning the property for a significant period of time.

A simple enough calculation for figuring out whether a 'no closing cost' refinance makes sense would be to divide all the upfront fees associated with a standard refinance by the additional interest you are paying every month through the higher rate.

Example:

$3,000 in fees / $125 extra a month in extra interest = 24 months.

If you plan on staying in the home for longer than 2 years, a 'no closing cost' refinance would not be a wise financial decision.