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

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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.

What is a no-closing-cost refinance?

In a typical refinance, a borrower will pay a lump sum at the closing to cover costs such as the appraisal fee, title search, title insurance and application fee.

With the no-closing-cost option, you don’t pay for these items upfront. Instead, you can finance them into the loan or pay a higher interest rate on the same principal balance.

What are refinance closing costs?

Closing costs cover the expenses your lender incurs while processing your mortgage. They are generally 2 percent to 5 percent of the loan’s principal balance.

Closing costs vary from state to state, however. 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.

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.

Adverse market fee

Beginning on Dec. 1, 2020, the Federal Housing Finance Agency started charging an additional 0.5 percent fee on most refinances on loans worth $125,000 or more. For a $300,000 refinance, that equates to $1,500. According to the FHFA, the fee is meant to protect Fannie Mae and Freddie Mac from a coronavirus-related market slump.

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.

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

On the other hand, 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.

“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.”

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 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.

No-closing-cost refinance pros and cons
Pros Cons
No cash needed upfront Can cost more if you’re in the home long-term
Can lead to savings if you’re in the home short-term May have to pay PMI

Other ways to cut refinance costs

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

  • See if you qualify for a fee waiver. Some lenders will waive the appraisal fee for existing customers or borrowers who have significant equity in their homes.
  • 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. Solicit mortgage quotes from multiple 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.

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