As a loan originator, from time to time I will have a refinance customer ask for a "no-cost" loan. Anyone considering a no-cost loan should a) know the costs behind the no-cost loan, and b) compare the no-cost loan to their alternatives. Of course, some homeowners may not have alternatives. If you have little or no equity in your home and don't have the available funds to pay your closing costs out of pocket, the no-cost loan may be your only option. But even for those that have little equity, paying private mortgage insurance ("PMI") may be a better option than a no-cost loan.

In Texas, where I originate loans, closing costs for mortage loans tend to be higher than other states due to our famously high, state regulated title insurance premiums. For purposes of this commentary, I'm referring to Texas refinance loans.

Here is a real example of two options for a homeowner to refinance without paying closing costs out-of-pocket, based on rates as of 1/16/12, assuming a $300,000 home value, $200,000 loan amount, 30-YR Fixed conforming loan:

OPTION 1 - No-cost loan. Loan amount $200,000 Interest Rate = 3.99% Estimated closing costs = $2,560 (paid by lender) APR = 4.013% Payment = $953.68/mo Total finance charges (life of loan) = $143,926

OPTION 2 - Roll closing costs into loan. Loan amount = $202,560. Interest Rate = 3.625%. APR = 3.648 Payment = $923.78 Total finance charges = $130,599

Two ways of refinancing with no out of pocket expenses. Same end result, but the borrower taking the no cost option ends up paying $29.90 more a month, and over $13,000 more in interest over the life of the loan.

And, for customers that wish to have the lender also pay their initial escrow deposit, the numbers only get worse. Rolling closing costs and prepaid expenses into your loan balance is usually a better option than a no cost loan.