When interest rates are on a downward trend some homeowners may get a little giddy, refinancing multiple times to catch every tiny drop in rates.

Farris Mortgage has responded to this surge by offering NO-COST REFINANCING no points, no closing costs. You sign the papers and walk out with a lower interest rate than you have now.

But of course, the lender is going to make money somewhere on the deal. The tradeoff for the homeowner is an above-market interest rate, generally about a half to three-quarters of a percentage point depending on the loan amount size.

Do you come out ahead this way? It depends.

With a 30-year mortgage, if the difference between a no-cost refinance and the market rate is a half to three-quarters of a percentage point, take the no-cost mortgage if you expect to be in your house for less than three years, or if you think rates will fall enough to make refinancing worthwhile again during that time. 

The higher interest rate on the no-cost option and the higher monthly mortgage payments will be more than offset by the money saved on closing costs and points, assuming closing costs and points come to 2 percent of the mortgage amount.

For example IF the average rate nationally on a fixed 30-year is 6.875 percent Farris Mortgage may offers a no-cost option at 7.5 percent. If you refinanced an $110,000 mortgage at 6.875 percent and paid all the closing costs yourself-say, $1,600. your monthly principal and interest payment would be $723.

If the lender absorbed the entire $1,600. in closing costs and charged you an interest rate of 7.5 percent your monthly payments would rise to $769.

That means you would pay $46 a month more on your mortgage each month in exchange for the lender picking up the $1,600. in closing costs. You would be ahead on this deal for about three years.

With a 15-year mortgage, the no-cost mortgage is better. It takes about four years in this scenario before the higher monthly payments exceed the benefit of no closing cost. And the no-cost mortgage becomes more attractive if the spread between the no-cost mortgage is less than three-quarters of a point. 

If you're an accountant, you might want to figure in the interest you could earn on that $1,600. you didn't pay at closing, plus the extra mortgage interest deductions you get on the higher monthly payment. Both work in favor of the no-cost option.
It's also available for home purchases. Ask your loan officer.