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No-Closing-Cost Refinance: What You Should Know
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A no-closing-cost refinance may be worth a look if you’re short on cash for closing costs, or if you’d prefer not to dip into your savings account to cover them. It’s also a good option if you plan to move in the next few years.
Don’t let the name fool you, though — a no-closing-cost refinance isn’t free. Understanding how it works will help you decide if this short-term benefit is worth the long-term cost.
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What is a no-closing-cost refinance?
A no-closing-cost refinance allows you to replace your current mortgage with a new one, minus the upfront fees. Instead of bringing cash to the closing table, your lender rolls your closing costs into your loan amount or increases your interest rate.
A no-cost refi doesn’t mean you aren’t being charged actual costs. The lender is simply offsetting the costs by charging you a higher interest rate or adding the costs to your loan amount. As a result, your monthly payments — and total interest paid — will be higher for the life of the loan than if you paid the costs with cash. If you choose to increase your loan amount, you’re also using up home equity, which means you’ll make less when you sell your home in the future.
How a no-closing-cost refinance works
The best way to understand how a no-closing-cost refinance works is to see the numbers in action. We’ll compare the short-term and long-term savings of rolling $5,000 worth of costs into the loan amount, versus adding them to the interest rate, for a 30-year fixed-rate refinance of a $300,000 loan.
| Refi with closing costs | No-closing-cost refi w/ higher interest rate | No-closing cost refi w/ higher loan amount | |
|---|---|---|---|
| Loan amount | $300,000 | $300,000 | $305,000 |
| Interest rate | 5.5% | 6.0% | 5.5% |
| Monthly payment (principal and interest) | $1,703.37 | $1,798.65 | $1,731.76 |
| Total interest costs | $313,212.11 | $347,514.56 | $318,432.31 |
| Total cost paid at closing | $5,000 | $0 | $0 |
The table below shows the dollar cost and savings of each no-closing-cost option, compared to paying the closing costs with cash.
| Refinance option | Out of pocket cost | Extra monthly payment cost | Extra long-term interest cost | Equity cost |
|---|---|---|---|---|
| Refi with closing costs | $5,000 | N/A | N/A | N/A |
| No-closing-cost refinance w/ higher interest rate | $0 | $95.28 | $34,302.45 | $0 |
| No-closing-cost refinance w/ higher loan amount | $0 | $28.39 | $5,220.20 | $5,000 |
The bottom line:
- Your monthly payment and total interest charges are highest for the no-cost refi with the higher interest rate
- Your monthly payment and total interest charges are lower for the no-cost refi with the higher loan amount, but you borrow an extra $5,000 of your home equity
- Your out-of-pocket cost is the highest for the refi with closing costs, but you’ll also have the lowest monthly payment and total interest charges — plus, you won’t tie up any home equity in the refinance
Common refinance closing costs
Mortgage refinance closing costs can range from 2% to 6% of your loan amount — this adds up, especially if you have a larger loan. For example, if you’re refinancing $300,000 and closing costs equal 2% of your loan amount, you’ll pay $6,000 in closing costs.
Standard refi closing costs include:
- Lender fees, such as origination, credit report and home appraisal fees
- Title costs, such as title insurance and escrow fees
- Property taxes and homeowners insurance premiums collected for your escrow account
THINGS YOU SHOULD KNOW
If you prefer to have your property taxes and insurance included in your monthly payment, you may want to budget to pay those costs out of pocket, instead of adding them to your no-closing-cost refinance. Your current lender is required to refund any escrow balance to you within 20 days of paying off your loan balance, so you may end up getting back the bulk of what you’ll spend.
No-closing-cost refinance pros and cons
| Pros | Cons |
|---|---|
| You’ll keep your cash in the bank | Your monthly payment will be higher |
| You won’t have to wait to recoup your closing costs | Your total interest charges will be higher |
| You won’t use up home equity on a no-closing-cost refinance with a higher rate | You’ll use up home equity on a no-closing-cost refinance with a higher loan amount |
When a no-closing-cost refinance makes sense
Here are some scenarios where a no-closing-cost refinance is a good option.
You want to save money immediately. When you refinance a mortgage, you don’t actually start saving money on your monthly payment until you recoup the costs you paid at closing. This is known as your “break-even point,” and it’s calculated by dividing your total costs paid in cash by your monthly savings. Since you don’t pay your costs in cash, your monthly savings start right away.
You plan to sell your home in the near future. If you’re growing out of your home and plan to sell soon, a no-closing-cost refinance allows you to save money without having to recoup your costs. Just remember: If you choose to add your closing costs to your loan amount, you’re using up some of the equity you could net when you sell your home.
You don’t want to deplete your cash balances. A low balance in your checking account or an underfunded emergency fund may be good reasons to choose a no-closing-cost refinance. You can even use the extra monthly savings to build up your cash reserves over time.
How to get the best no-closing-cost refinance deal
Boost your credit score. The better your credit score, the better chance you have to get the best no-closing-cost refinance rate. You can improve your credit score by maintaining on-time payments, paying down debt and disputing errors on your credit reports. Aim for a 740 credit score or higher to get the best rate.
Shop around with multiple lenders. While you might be tempted to refinance with your current lender, take the time to shop around for no-closing-cost options from a variety of lenders. You could potentially save tens of thousands by comparison shopping.
Negotiate lower costs and fee waivers. Talk to your lender about lowering your closing costs, even if you’re applying for a no-closing-cost refinance option. Some refinance transactions may qualify for an appraisal waiver, which can save you $300 to $400 or more and should result in a lower no-closing-cost interest rate offer. If you end up working with your existing lender and the same title insurance company, ask about a reissue rate for a discount on the lender’s title policy.