There are many reasons to refinance depending on your situation. Refinancing is a common instrument for a variety of purposes. There are various strategies that one can use in the market to get the best results for your intended goal.

If you are refinancing and do not want to pay the settlement costs out of your pocket, you can add the non-recurring closing costs to the new loan balance. This allows you to enjoy a lower interest rates while not paying any out of pocket expenses. This is different from a No Point, No Cost loan which does not add any money to your existing loan balance. In some cases, you may want a lower interest rate, but can't afford to pay closing costs and adding to your loan balance may be the best solution. Non-recurring closing costs are closing costs that are specific to that transaction and occur one time. These do not include interest and insurance you may be required to prepay at closing. These recurring costs are costs that you would normally pay as part of property ownership and are not a result of the transaction.

For example, if you refinance an existing $100,000 loan and your closing costs are $2,000, then instead of refinancing $100,000, you would refinance $102,000 and the $2,000 would be added to your loan amount. This way, instead of paying the $2,000 closing costs out of your pocket, you finance the $2,000 in the new loan amount. For a 7% interest rate and 30 Year term, the $2,000 adds $13.31 to your monthly payment.

Lenders usually offer various combinations of interest rate and points for the same exact loan. For example, a lender may offer 8% interest with zero points or 7% interest with 2 points for the same exact loan. When you buy down the interest rate, you are paying more points in return for a lower interest rate. Depending on the lender, you may be able to buy down the rate up to 2-3 percent which can be a large difference in monthly payment. Using the above strategy of financing settlement costs, you could finance the additional points you pay which means you would not have to pay the points out of pocket.

For example, you are refinancing for a $100,000 loan amount. You are offered 8% with zero points, but you wish to buy down the interest rate. The lender has a loan that offers 7% with 2 points. The 2 points equals $2,000. If you finance the points, this adds $13.31 to your monthly payment. However, the monthly payment on the 7% loan($665.30) is $68.46 less than the monthly payment on the 8% loan($733.76) so you still have a lower overall monthly payment. In addition, a lower interest rate loan is easier to qualify for due to the lower monthly payment.