No-closing-cost refinance: What it is and how it works

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The closing costs associated with a mortgage refinance are typically 2 percent to 5 percent of your loan amount. However, it’s possible to wrap these expenses into your new loan with a no-closing-cost refinance. With a no-closing-cost refinance, you won’t avoid closing costs entirely — instead, 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 shorter period of time. Here’s the lowdown to help you decide.

What is a no-closing-cost refinance?

A no-closing-cost refinance is a refinance where you don’t have to pay for closing costs upfront to get a loan. Instead, you can finance them into the loan or pay a higher interest rate on the same principal balance.

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 application fee.

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.

Common refinance closing costs

Closing costs are generally 2 percent to 5 percent of the loan’s principal balance. They vary from state to state, however. The nationwide average refinance cost in 2021 for a single-family home was $2,375, according to ClosingCorp. 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: 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.
  • 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

  • No cash needed upfront
  • Can lead to savings if you’re in the home short term
  • Earlier break-even point, which is ideal for resellers
  • Allows you to use your savings for other projects, like renovations

Cons

  • Can cost more if you’re in the home long term
  • Might have to pay mortgage insurance
  • Typically has a higher monthly payment
  • Typically has a higher interest rate

When to choose a no-closing-cost mortgage

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,” says Greg McBride, CFA, Bankrate chief financial analyst. “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.”

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.

Rolling your closing costs into your new mortgage may also affect your loan-to-value (LTV) ratio, McBride says. This could reduce your home equity to the point where you are now required to pay private mortgageinsurance (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

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 a waiver: Some lenders will waive the appraisal fee for existing customers or borrowers who have significant equity in their homes.
  • Ask for a comp of the app fee: If you’re applying with a bank where you already have accounts, ask if they will comp the application fee. Many lenders give extra 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.

Is a no-closing-cost-refinance right for you?

A no-closing-cost-refinance can be a great option for people who are not planning to stay in the home for only a few years. If you are planning to stay in the home for the long term, a no-closing-cost-refinance can end up costing more over time.