What is a no-closing-cost refinance?
Quick insights
- A no-closing-cost refinance lets you update your mortgage without paying upfront fees.
- Instead of paying cash at closing, the lender shifts those costs into your new home loan. This is usually achieved through a higher interest rate or larger loan balance.
- Some lenders may offer pricing options (including lender credits) that can reduce certain closing costs.
At the end of most real estate transactions, you’ll typically have to pay closing fees to finalize the transaction. However, a no-closing-cost refinance mortgage offers a way around paying these upfront, out-of-pocket expenses.
First, what are closing costs?
Closing fees are the upfront fees you pay when finalizing a home purchase or refinance. They typically include expenses like loan origination fees, home appraisal costs, title services and property taxes. Borrowers pay these costs on closing day when the loan is finalized.
What is a no-closing-cost refinance?
A no-closing-cost refinance is a mortgage option that helps you avoid paying closing fees on closing day. If you want to refinance but don’t want to front the cash for fees, you may find a loan that absorbs these costs. You still owe the fees, but you pay them over time. To make this work, lenders must recover the money they would normally collect at closing.
How does no-closing-cost refinance work?
A no-closing-cost refinance is structured one of two ways.
You will generally choose between two options: a higher interest rate or a higher principal balance.
- Increase your interest rate: If you accept a higher rate, the lender covers your upfront costs. This may be a good idea if you plan to move soon after closing. If you stay in the home long-term, however, you may pay more in total interest over the life of the loan.
- Increase your principal: Rolling closing costs into your loan balance increases your principal. This raises your monthly payments, but it keeps your interest rate lower.
Your lender might let you choose, or they may require a specific option based on what they offer. When refinancing, it’s important to calculate your break-even point. Lenders can also help you see how each choice impacts your monthly payment and the total cost of the loan.
What are the average closing costs when refinancing?
When you refinance your mortgage, closing costs typically range from about 2% to 6% of the new loan amount. While that looks like one large bill, it’s made up of several different fees. Some are charged by your mortgage lender and others are charged by third parties involved in the closing process. Here’s a breakdown of the common closing costs you may see.
Loan origination and lender fees
These are the fees your mortgage lender charges to set up and process your new home loan. The origination fee is often around 0.5% to 1.5% of the loan amount. This may include the application, mortgage underwriting or processing fees.
Home appraisal fee
A home appraisal confirms the current value of your home, which plays a major role in your refinance terms. The home appraisal fee typically ranges from $300 to $1,000, depending on your property and location.
Title services
Title services fees help ensure there are no ownership issues tied to your property. A property title search confirms the legal ownership history. Title insurance helps to protect against future ownership disputes.
Credit and other third-party fees
These smaller fees cover services needed to verify your financial information and property details. The credit report fee checks your credit history. Other third-party fees may also include tax service or flood certification fees for high-risk flood areas.
Government and recording fees
These fees are required to officially update your loan with your local municipality. Recording fees vary based on where you live.
Prepaid costs and escrow funding
Some refinance transactions include upfront payments for ongoing homeownership expenses. These may include prepaid interest, property taxes and homeowner’s insurance. You may also need to fund your escrow account on the day of closing, which helps your mortgage provider pay these expenses on your behalf over time.
No-closing-cost refinance pros and cons
A no-closing-cost refinance can be a helpful option if you want to refinance without paying upfront fees. While a refinance mortgage with no closing costs may reduce what you owe at closing, it’s important to know how those costs are handled and what that means for you long term.
Pros
- Less money required upfront: One of the biggest advantages of a no-cost refinance is that you don’t have to pay closing costs out of pocket.
- More flexibility with your finances: Choosing a refinance without closing costs can free up cash reserves for other priorities like home improvement projects, paying off credit card debt or building an emergency fund.
- Helpful for short-term homeowners: If you don’t plan to stay in your new home for the long-term, a refinance option with no closing costs may help you avoid paying fees you wouldn’t fully recoup over time.
Cons
- Potentially higher interest rates: A no-fee refinance may come with a slightly higher interest rate, because the lender needs to offset the closing costs they’re covering.
- Higher monthly payments: Your monthly mortgage payment could be higher because of a higher mortgage interest rate or because closing costs are rolled into your loan balance.
- Potential costs over time: Even though you’re avoiding upfront fees, a no-closing-cost refinance may cost more over the life of the loan depending on your interest rate.
FAQ for no-closing-cost refinancing
Do you have to pay closing costs every time you refinance?
Not always. While most refinance loans include closing costs, you don’t necessarily have to pay them upfront. Options like a no-closing-cost refinance allow you to roll those costs into your new loan or accept a higher interest rate instead. That said, you are usually still paying those costs in some form. The loan is just structured differently.
Can you negotiate closing costs?
You may be able to negotiate, which could save money over the life of your loan. Shop around and compare loan estimates from multiple lenders. You can use competing offers to ask a lender to lower or waive certain fees, like the application or origination fee. Having a strong credit score may improve the terms a mortgage lender could offer.
In summary
Whether you want to lower your monthly payments or reduce the overall cost of your loan, refinancing a mortgage with no closing costs may help you reach your goals. A no-closing-cost refinance may be worth exploring if you want to save your cash today. Work with your lender to find the right option for your budget and plans. You can also compare estimates between lenders, negotiate terms and consult with a Home Lending Advisor to see what is right for you.
