When you obtained a mortgage, you probably remember paying closing costs all too well. Now that you’re refinancing your mortgage, get ready to get reacquainted with them. A refi is really just getting a new mortgage — and so, the closing costs associated with a mortgage refinance are roughly the same as the first time around.

However, it’s possible to duck these expenses to a degree via a no-closing-cost refinance. A no-closing-cost refinance doesn’t let you avoid closing costs entirely. But it does let you delay them: Instead of paying them upfront in cash, you’ll finance these expenses as part of your loan.

You might consider a no-closing-cost refinance if you plan to stay in your home for a foreseeable, relatively shorter period of time. Here’s the lowdown to help you decide.

What is a no-closing-cost refinance?

In a typical refinance, a borrower pays a lump sum at closing to cover costs such as the appraisal fee, title search, title insurance and various loan application/origination fees.

In a no-closing-cost refinance, no upfront payment is required. Instead, the expenses are rolled into the loan itself, increasing its principal (and thus, the amount of interest you’ll pay on that principal). Or, the lender might charge you a higher interest rate on the same principal balance.

How does a no-closing-cost refinance work?

No-closing-cost refinancing eliminates closing costs, but there are trade-offs. That includes charging a higher interest rate, which can cost more over the course of the full life of the mortgage.

A no-closing-cost refinance may also include the fees in the financing, so instead of charging them upfront, the fees would be spread over the life of the loan.

Average refinance closing costs

Closing costs can run anywhere from 2 percent to 6 percent of the loan’s principal amount; 3 to 5 percent is the most typical range. Overall, refis tend to run cheaper, closing cost-wise, than new purchases because some expenses (like transfer taxes) won’t exist. When it comes to the loan-related closing costs, they’re about the same, though.

In dollar terms, the average closing costs on a refinance are approximately $5,000, according to Freddie Mac, the government-sponsored entity that backs and buys loans. But the costs themselves, and their amounts, can vary considerably from state to state — anywhere from $1,400 to $10,000.

In addition to an application fee, which some lenders charge and others don’t, common closing costs include:

  • Appraisal fee: The appraisal fee is charged when a professional appraiser inspects the home to determine its value before the lender extends a mortgage offer. It usually ranges from $300 to $450 or more.
  • Credit check: Lenders often charge a fee to pull your credit report in order to determine whether you’re a qualified borrower. This can cost $25 or more per borrower.
  • Origination fee: Some lenders charge a fee to initiate the loan, which typically costs around 1 percent of the amount being borrowed.
  • Title search: A lender will look up the property record of the home title to ensure there are no issues with property ownership or liens. This can cost around $450.
  • Mortgage insurance: Most FHA loans include an upfront mortgage insurance premium that you will have to pay. It is typically 1.75 percent of the loan amount. If you’re doing an FHA streamline refinance, which converts one FHA loan to another, the fee is 0.1 percent.
  • VA funding fee: If you’re refinancing a VA loan, you will have to pay a percentage of the new loan back to the Department of Veterans Affairs. If it’s your first VA loan, you will pay a 2.3 percent funding fee. If you’ve used Refinancing from one VA loan to another VA loan in an Interest Rate Reduction Refinance Loan (IRRRL), or VA streamline, the funding fee will be 0.5 percent.

No-closing-cost refinance pros and cons

Pros of a no-closing-cost refinance

  • No upfront payment. Put your wallet away: There’s no need to liquidate investments to come up with a few thousands in cash. The deal can go through even if you don’t have any savings.
  • Earlier break-even point. When you pay closing costs to refinance, it can take a while for the new monthly payments to help you break even. So that’ll happen faster if you skip that upfront outlay.
  • Money for other things. You can use the funds you would have spent on closing costs for other expenses, home renovations or investments.
  • Savings if you’re moving soon. No-closing-cost refis are more expensive over the long-term. But if you’re only going to have the home for a few more years — less than 10 — you won’t bear the full cost of the higher rate or bigger principal balance.

Cons of a no-closing-cost refinance

  • Higher interest rate. Many lenders compensate for the lack of upfront closing costs by charging a higher interest rate. This could be counterproductive, if your aim in refinancing is to score a better interest rate (at least 1 to 2 percent lower).
  • More expensive long term. Whether it’s due to the raised rate or to the increased principal, you’ll be paying more interest than if you’d paid closing costs upfront.
  • Might incur mortgage insurance. Rolling your closing costs into your new mortgage may also affect your loan-to-value (LTV) ratio. This could reduce your home equity to the point where you are now required to pay private mortgage insurance (PMI), which adds to your monthly payment.
  • Higher monthly payment. Your monthly payments will be higher than they’d be if you’d paid the closing costs upfront.

Who is a no closing-cost-refinance best for?

It’s important to figure out how long you plan to stay in the property and what your breakeven timeline on your potential closing costs might be.

  • When it makes sense: If you’re planning to move in a year and it will take two to three years to break even on your closing costs, you’ll still realize a net savings while you stay put, even as you pay a little more in interest on your loan than you would otherwise.
  • When it doesn’t make sense: If you plan to stay in the property for decades and you’ll break even on your upfront closing costs in just two or three years, then a no-cost closing doesn’t make sense, because you’ll wind up paying more in the long run.
The additional interest on the loan will add up over time. And the longer you have that loan, the higher that cost will go. If you have that loan for decades to come, you may end up paying those closing costs a couple of times over. — Greg McBride, Bankrate Chief Financial Analyst

If you want your lender to roll the closing costs into the refinanced amount, you need to make sure that your total payments (principal and interest) are less than what they would have been had you paid the closing costs upfront. That’s not always the case.

Bankrate’s mortgage refinance calculator can help you determine the actual savings and costs of refinancing your current mortgage. You can also check actual refinance rates in your area.

Other ways to cut refinance costs

Getting a no-closing-cost mortgage isn’t the only way to lower your upfront mortgage expenses. Here are some other ways to pay less out of pocket:

  • See if you qualify for an appraisal waiver: Some lenders will waive the appraisal fee for existing customers or borrowers who have significant equity in their homes.
  • Ask for a break on the app fee: If you’re applying with a bank where you already have accounts, ask if they will comp the application fee or other fees. Many lenders give perks like this to existing customers.
  • Shop around: This is probably the most important thing you can do. Get quotes from multiple mortgage lenders, and make sure to compare all the different terms — not just interest rates, but closing costs and other fees, too. Go with the lender who gives you the all-around best deal.