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The mortgage market is full of gimmicks, and one that's currently making the rounds is an offer to refinance FHA or VA-backed loans with no closing costs.

There is, of course, a catch. Both FHA and VA loans currently are offered with a 10-percent interest rate by most lenders, but the companies that promote the cost-free option generally are charging 11 percent interest.Someone with an old FHA-insured or VA-guaranteed loan at 12 percent or 13 percent might be attracted by these ads major national lenders such as Sears Mortgage Corp., are among those offering them.

Are they a good deal?

In general, if you had a rate of 12 percent or higher and planned to stay in your house for just a few years more, it would be worthwhile to refinance at 11 percent if no closing costs were involved.

But if you planned to stay in the house for four years or longer, you would be better off going to a lender offering loans at 10 percent and paying the closing costs.

Consider the case of a homeowner who has an $80,000 FHA-insured mortgage with a 12 percent interest rate.

He gets an unsolicited offer through the mail to refinance at 11 percent interest with no closing costs. This loan is convenient because it requires no appraisal and none of the usual refinancing hassles as long as the homeowner has paid his mortgage on time and has a good credit history.


But a call to a local lender shows the homeowner could refinance his FHA mortgage with a 10 percent interest rate if he paid the normal closing costs, including 2 1/2 points. In his case that would bring the total closing costs to about $2,400.

With his 12 percent FHA loan, the homeowner currently is paying $823 a month for principal and interest. By reducing that loan to 11 percent, he would cut his monthly payment to $762, a savings of $61 a month or $732 a year.

On the other hand, if he took the 10 percent loan, his principal and interest payment would drop to $702 a month, a savings of $121 a month or $1,452 a year. But it would be 20 months before he had recouped the $2,400 spent for closing costs, so the real savings would not start for almost two years.

As a result, three years after refinancing the homeowner would have saved $2,196 by switching from a 12 percent rate to an 11 percent rate with no closing costs, and $1,936 by switching to a 10 percent rate with $2,400 in closing costs.

Four years after the refinancing, however, the advantage switches to the 10 percent mortgage $3,388 saved compared with $2,928 under the 11 percent mortgage. And the advantage of the lower interest rate grows each year the homeowner stays in the house so that after a decade, the 10 percent mortgage has saved $12,000 and the 11 percent mortgage only $7,300.

The difference in savings is substantial enough over the years to encourage a homeowner to study his situation carefully before signing up for a no-closing-cost mortgage. Clearly, such a mortgage could be advantageous to a homeowner planning to sell his house in a couple of years.

Robert Clammer, a vice president of the Houston-based North American Mortgage Co., one of the lenders that offers the no-closing-cost loans, says they appeal to a number of customers.

For instance, he said, in depressed markets where home values have fallen, homeowners find they cannot qualify for refinancing the traditional way, but they can refinance with his company.

"With this program we require no appraisal," Clammer said. "What it does is give the borrower with a 12 or 13 percent interest rate something better than what they have."