A no-closing-cost refinance is a mortgage refinancing option where the lender covers the closing costs in exchange for a higher interest rate or by rolling the costs into the loan principal.
If you’re having trouble making payments on your mortgage loan, a refinance could present you with a flexible solution that doesn’t require you to sell your home. But refinancing a mortgage loan can also be expensive, which is not ideal if you’re already having trouble making your loan payments.
A no-closing-cost refinance can help you get into a new loan without as much upfront cost. But these refinance options are not free, so it’s crucial to understand what you’re signing up for before signing on the dotted line.
“A no-closing-cost refinance can be an attractive option for some homeowners, but it's important to weigh the pros and cons before making a decision,” says Jose Garcia, president and CEO of Northwest Community Credit Union.
- What is a No-Closing Cost Refinance?
- Pros
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What is a No-Closing Cost Refinance?
A no-closing-cost refinance is exactly what it sounds like: A refinancing of an existing mortgage with no closing costs. Instead, the money you would’ve paid at closing is added to your refinanced mortgage, so you’ll have a higher balance than a traditional refinancing.
Most mortgage shoppers know that when you sign onto a loan, you’ll need to cover closing costs before you can move into the property you buy. Closing costs are expenses you pay your lender in exchange for providing a variety of services needed to legally close a home sale.
Refinancing a mortgage loan also comes with closing costs. A significant percentage of your closing costs when buying a home goes toward verifying your assets and preparing paperwork, which is also necessary when replacing your current loan with a new financing plan. If you’re buying with a government loan, you’ll also need to verify that the property meets U.S. Department of Agriculture (USDA) or Federal Housing Administration (FHA) standards.
Some examples of closing costs you might need to pay when you refinance may include:
- Underwriting fee
- Appraisal fee (if working with a new lender)
- Credit report fee
- Title search (if working with a new lender)
Pros
- No Upfront Costs: “The most obvious benefit is that you don't have to pay closing costs out of pocket,” Garcia says. “This can be particularly helpful if you don't have the cash on hand to cover these expenses.”
- Immediate Savings: “You can start saving money immediately since you won't need to pay the closing costs upfront,” Garcia says.
- Simplified Process: “It can make the refinancing process simpler and quicker since you won't need to gather the funds for closing costs,” Garcia says.
- You can use funds for other purposes: Instead of using the money for closing costs, you can allocate those funds toward renovations or other means that might increase your home’s value or equity.
Cons
- Higher Interest Rate: “Lenders typically charge a higher interest rate on no-closing-cost refinances to cover the costs they are absorbing,” Garcia says.
- Increased Loan Balance: “Alternatively, the closing costs may be added to your loan balance, which means you'll be paying interest on these costs over the life of the loan,” Garcia says.
- Long-Term Costs: “While you save money upfront, you may end up paying more over the life of the loan due to the higher interest rate or increased loan balance,” Garcia says.
How Do No-Closing-Cost Refinances Work?
No-closing-cost refinances are not free. While you don’t pay for your closing costs upfront with this type of refinancing, you end up paying more over time because you must pay your original balance plus the value of any interest that has accumulated. While it might not seem like it upfront, a no-closing-cost mortgage refinance usually ends up being more expensive than a standard refinance.
If you can afford to pay your closing costs on your refinance upfront, you can end up saving hundreds or even thousands of dollars by the time you own your home in full. But if you’re taking advantage of an immediate tangible benefit on your home loan and you’d need to finance closing costs anyway, a no-closing-cost refinance can provide more affordable rates when compared to personal loans or putting your closing costs on a credit card.
For example, imagine you’re refinancing a loan amount of $200,000 and you cannot pay the $4,000 closing costs. With a no-closing-cost refinance, you would be able to sign on your new loan with zero closing costs required in cash. But you will accept a loan with a balance of $204,000 instead of $200,000 – that’s the original balance plus the balance of your closing costs.
Average Closing Costs When Refinancing A Mortgage
Closing costs when refinancing a mortgage typically range from 2% to 6% of the loan amount. The average closing costs for refinancing a mortgage can vary depending on various factors such as the loan amount, location and lender.
- Origination fee: The lender charges an Origination fee for processing the loan, typically around 0.5% to 1% of the loan amount.
- Appraisal fee: An appraisal is required to determine the current market value of the property being refinanced. The cost of an appraisal can be between $300 and $500.
- Title search and insurance: A title search ensures that the property has a clear title, while title insurance protects the lender in case there are any issues with the title. The cost can range from $500 to $1,000.
- Points: Points are optional fees paid to reduce the interest rate on the mortgage. Each point is equal to 1% of the loan amount.
- Credit report fee: Lenders pull a credit report to assess the borrower's creditworthiness. This fee ranges from $30 to $50.
- Prepaid expenses: These include property taxes, homeowner's insurance and prepaid interest that the borrower needs to pay at closing.
Benefits of No-Closing-Cost Refinancing
No-closing-cost refinances come with a number of benefits, including:
Fewer Hurdles to Refinancing
From not being able to afford your monthly payments to taking advantage of lower interest rates, there are a number of reasons you might need to refinance your mortgage loan quickly. If you have everything in place to refinance but cannot afford closing costs, it can be worthwhile to take a no-closing-cost mortgage refinance loan.
Cheaper Short-Term Option
Depending on the balance of your closing costs and your interest rate, rolling your closing expenses into your loan might add only a few dollars to your mortgage premium. In many cases, no-closing-cost refinances are more affordable in the short term, allowing you to pay back any money you borrow over the course of 15 to 30 years according to your term.
Can Make Future Refinancing More Affordable
If you know you’re going to refinance your loan again in the future, it doesn’t make much sense to pay your closing costs upfront each time. By rolling your closing costs into the value of your loan, you can refinance this balance again at a later date instead of saving money and paying upfront.
Risks of No-Closing-Cost Refinancing
It's important to understand that no-closing-cost refinancing isn't free. It's essential to weigh the costs and cons to determine whether this option is the best choice for your financial situation. Be sure to consider the following before you sign on a new loan.
Higher Rates
Most mortgage lenders charge higher interest rates on refinances with no-closing-cost stipulations. The increased interest rates associated with no-closing-cost refinances are meant to offset the costs that would normally be covered by closing fees. In other words, the lender is still making a profit from your loan, but it’s doing so by charging you more in interest rather than asking you to pay upfront fees. As a result, you may wind up paying thousands of extra dollars in interest over the life of your loan if you choose to go this route.
Makes it More Difficult to Own Your Home
When you take a no-closing-cost refinance, the balance of your closing costs is added to the principal balance of your loan. You pay them back over time with interest the same way you pay off what you owe on your home. Rolling closing costs into your loan means you’ll spend more time paying back what you owe.
Potentially Higher Monthly Payment
Because you’re accepting a higher-value loan, no-closing-cost refinances result in higher monthly payments when compared to standard refinances.
Most drawbacks of a no-closing-cost refinance have to do with extra expenses. If you need to refinance quickly, a no-closing-cost option might be right for you. But if you can afford to pay your closing costs upfront, you’ll save money over the course of your loan.
No-Closing-Cost Refinance Options
As a homeowner, you have dozens of choices when it comes to selecting a bank or lender to provide the best no-closing-cost mortgage or refinance. The best lender for your needs will vary depending on the type of loan you have, the reason you want to refinance your loan and where you live.
Keep in mind that not every lender that offers refinancing will provide no-closing-cost refinancing options, and qualification standards for no-closing-cost loans may vary from standard refinancing.
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The Bottom Line
- No-closing-cost refinance can be a great option for homeowners looking to refinance their mortgage without having to pay upfront fees typically associated with closing costs.
- Lenders offering no-closing-cost refinances may offset the costs by charging higher interest rates or including the closing costs in the overall loan amount.
- Homeowners should carefully weigh the pros and cons of a no-closing-cost refinance option, considering factors such as current interest rates, loan terms and potential savings over the long term.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who has won awards for his coverage of the New York City economy. He has navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Jose Garcia, president and CEO of the Illinois-based Northwest Community Credit Union, which offers multiple financial services, including mortgages.
Frequently Asked Questions
Can you refinance without closing costs?
Yes, a no-closing-cost refinance allows homeowners to negotiate their home loan without paying closing costs. The trade-off, however, is that those costs are rolled into the loan and added to your principal, creating a larger balance and higher interest rates than funding the closing costs upfront. The strategy may be useful to some, depending on their financial situation.
What happens if you don't have the money for closing costs?
If your lender allows it, you can get a no-closing-cost mortgage or refinance. This loan type allows you to close on a house or change the term of your home loan without having to pay closing costs to seal the deal. That said, those costs are rolled into your loan balance, so you’ll have more interest and a higher principal balance to pay compared to a traditional closing.
At what point is it not worth it to refinance?
Refinancing might not be worth it if the Prime interest rate is higher than what’s on your mortgage or if you don’t have the funds to close a refinancing. You could try to find a lender that allows for a no-closing-cost refinance, though that money will be added to your balance.
Sources
- Jose Garcia, president and CEO of Northwest Community Credit Union
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.