Closing costs are one of those things that can catch you by surprise, whether shopping for a first home or refinancing an existing mortgage. Whatever the case, at the end of most real estate transactions, you’ll typically have to pay closing fees to finalize the offer. Fortunately, there is a way around this dilemma with a no closing cost refinance mortgage.
First, what are closing costs?
Closing fees, or closing costs, include the upfront costs, in addition to your down payment, that come with buying or refinancing a home. They are paid once you receive your title or once the transaction is finalized. Closing costs cover things like title searches, taxes, credit report changes, home appraisals and other loan origination items. Whether you’re taking out your first mortgage or refinancing one that already exists, closing costs are part of the process.
What is a no closing cost refinance?
A no closing cost refinance is mortgage refinancing that helps cover closing costs. So, if you’re looking to refinance but don’t have the cash to cover additional closing fees upfront, you can shop around for a loan that can cover your closing fees at signing. You’ll still owe closing fees, but you have the benefit of paying them over time.
To be clear, closing cost refinances do not alleviate you from paying fees. For a no closing cost refinance to make sense for a lender, they need to recoup the money they would have received upfront during closing.
How does no closing cost refinance work?
A no closing cost refinance simply disperses the fees elsewhere in your loan. You can either increase your interest rate or increase your principal. With an interest rate increase, you are agreeing to a higher interest rate. This might make sense if you don’t plan on staying in this home long-term. But if you are, you may end up paying more over time than if you covered the closing costs upfront. An increase in your principal means the closing costs are tacked on to the cost of the mortgage, which increases the amount of your monthly payments.
Your lender may be flexible with which option you prefer, or they may require you to increase your interest rate or principal as part of their terms. Make sure you’ve weighed your options and are financially prepared for the outcome.
No closing cost refinance pros and cons
- Less money required up front
- Potentially less costly than other loan or refinancing options
- Frees up cash for other projects, like home renovations
- Good for short-term savings if you plan on moving soon
- Potentially higher interest rates
- Higher monthly payments
- May end up paying more overtime
How to refinance a mortgage with no closing costs
Refinancing a mortgage with no closing costs works similarly to refinancing traditionally with closing costs. You can shop around for a lender or just coordinate with your existing lender for your desired terms. After working out the terms with your lender, you can start making payments toward your new mortgage each month. (Note, not all lenders offer refinancing options without closing costs.)
Navigating a no closing cost refinance may be worth exploring depending on how long you’re planning to stay in the home, as well as what makes the most sense for your finances. Consult with a home lending advisor to see what’s right for you.