The basics of no-closing-cost mortgage refinancing

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The closing costs associated with a refinance can typically be 2 percent to 5 percent of your loan amount. It’s possible to wrap the expenses into your new loan with a no-closing-cost refinance.

What is a no-closing-cost mortgage refinance?

In a typical refinance, a borrower brings a check to the closing table to cover costs such as the appraisal fee, title search, title insurance and application fee.

With a no-closing-cost option, you don’t pay for these items upfront. Taking this route essentially means you pay a higher interest rate for the term of the loan, because you’re borrowing the closing costs by financing them into the loan.

What are closing costs and what is included?

Closing costs are all of the expenses associated with the mortgage, and generally range from 2 percent to 5 percent of the loan principal. In addition to an application fee, which some lenders levy 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 can range 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 can cost about $125.

Title search – Unless you’re buying a new home, a lender will look up the property record for the title of the home to ensure there are no issues with property ownership or liens. This can cost around $450.

Keep in mind that closing costs vary from state to state. The average closing costs (including taxes) in New York in 2019 were $12,847, according to real estate data firm ClosingCorp. In the same year in Indiana, they were $1,909. The nationwide average was $5,749.

When a no-closing-cost refinance may work for you

Taking your current situation and long-term plans into account is crucial when refinancing, particularly when contemplating a no-cost refinance.

For instance, if you plan to stay in your home for five years or less, a no-closing-cost mortgage might be a good option. It can take more than five years to recover closing costs with a traditional mortgage, so paying the higher rate over a few years but saving those costs now could end up being cheaper for you.

On the other hand, a no-closing-cost mortgage means paying a higher interest rate for the life of the loan. If you plan to stay in your home for an extended period, that higher interest rate could cost you far more out of pocket over the long run.

“The additional interest on the loan will add up over time,” explains Greg McBride, CFA, chief financial analyst at Bankrate. “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.”

Another way you can avoid upfront closing costs is by having the lender roll the closing costs into the refinanced amount. In this scenario, you need to make sure that your total payments (principal and interest) on the refinanced amount are less than what they would have been had you paid the closing costs upfront. That’s not always the case.

Rolling your closing costs into your new mortgage may also affect your loan-to-value (LTV) ratio, McBride cautions. 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.

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

Yet another way to reduce refinance costs is to ask whether you qualify for an appraisal waiver, says Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate.

“To see if you qualify for an appraisal waiver, you’ll want to reach out to a mortgage lender,” says Beeston. “An average appraisal is between $450 to $650 depending on where you live and the type of property, so qualifying and utilizing the waiver can save you a good amount of money.”

Some lenders waive the valuation for low-risk transactions or for strong borrowers who have significant equity. Others may waive the application fee, especially for current customers.

“I have seen homes with as little as 10 percent equity qualify for an appraisal waiver so it is always a good idea to ask your lender,” says Beeston, adding that obtaining a waiver can speed the refinance and remove some of the stress associated with the process.

Due to the pandemic, it may be even easier to get an appraisal waiver today.

Remember to shop around

Comparison shopping is critical for homeowners hoping to save money on a refinance, says Chris Birk, director of education for Veterans United Home Loans.

“Rates and fees can vary significantly, and some lenders can bury costs in the fine print that wind up swelling your loan balance and reducing the impact of the refinance,” Birk explains. Understanding all of your mortgage options is also a key part of ensuring you’re getting the best deal possible.”

Look for lenders you trust that are willing to run the numbers to help you find the best fit for your unique situation and goals, says Birk.

Featured image by Roman of Adobe Stock.

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