Is a No-Closing-Cost Refinance Right for You?

A no-closing-cost refinance might be right for you if you don’t have the cash to pay closing costs or you prefer to keep your savings intact. It may also make sense if you plan to move in the next few years.

Refinancing your mortgage can be expensive, though there are ways to refinance without closing costs. That doesn’t mean, however, that you’re getting away with a free refinance.

• What is a no-closing-cost refinance?
• How a refinance without closing costs works
• Pros and cons of a no-closing-cost refinance
• 5 ways to reduce your mortgage refinance fees

What is a no-closing-cost refinance?

A no-closing-cost refinance doesn’t include upfront fees. Instead of having you bring cash to the closing table, your lender agrees to roll your closing costs into your loan amount or increase your interest rate.

When a lender does a no-cost refi, it doesn’t mean there aren’t actual costs. Because the lender is offsetting the costs through a higher rate or larger loan amount, your monthly mortgage refinance payments — and total interest paid — will be higher for the life of the loan than if you’d paid closing costs.

Common refi closing costs include lender fees, an appraisal fee, a credit report fee, title search and insurance fees, and settlement fees.

How a refinance without closing costs works

Mortgage refinance closing costs can range from 2% to 6% of your loan amount, which can be costly if you have a larger loan. For example, if you’re refinancing a $250,000 loan and owe 2%, you would pay $5,000 in closing costs.

If you work with a lender that offers a no-closing-cost refinance, you wouldn’t pay that $5,000 — or whatever amount of closing costs you may owe — out of pocket.

Let’s compare a standard refinance and a refinance without closing costs for a 30-year loan. For the no-cost refinance, the lender chose to increase the interest rate.

As the table illustrates, the no-cost refi comes with a mortgage payment that is about $71 more each month and a total interest cost that is more than $25,000 higher than the standard refinance.

Pros and cons of a no-closing-cost refinance

Choosing to refinance without closing costs has its pros and cons. Here are some key benefits and drawbacks to consider.

Pros

• Save money immediately. When you pay closing costs on a refinance, it’s important to calculate your breakeven point, or the time it takes for your monthly savings from refinancing to cover the cost of the refinance. When you choose a no-closing-cost refinance, there’s technically no breakeven point to consider. If you’re unsure of how long you’ll stay in your home, a no-cost refinance can make a lot of sense. A refinance calculator may give you a better idea of whether this type of refi can work for you.
• Simplify mortgage shopping. If the closing costs are the same across lenders ($0 upfront) and you’re clear on the mortgage type and loan term you want, then the interest rate would be the main variable to compare among multiple lenders. However, if your closing costs are being added to your loan principal in lieu of a higher interest rate, you’d still want to compare each lender’s costs to understand how they affect your total loan amount.

Cons

• Make a higher monthly mortgage payment. A larger loan balance or higher interest rate means a larger monthly payment amount. In the example above, the $71 difference in payments on a loan with a rate that is 0.5 percentage points higher adds up to more than $850 a year.
• Pay more money over the life of your loan. If a lender wraps closing fees into the loan, you’ll have a larger loan balance to repay. That means you’ll pay more in interest over the life of the loan.

5 ways to reduce your mortgage refinance fees

Here are some other avenues to cut down on costs beyond a no-cost refinance.

• Build more equity before you refinance. If you have private mortgage insurance (PMI) on your existing loan, you know it’s an extra monthly cost. To get rid of PMI on your refinance, you’ll need to have at least 20% equity in your home.
• Boost your credit score. The better your credit score, the better chance you have to get the best refinance rate. 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 before you do. 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. Some refinance transactions may qualify for an appraisal waiver, which can save you $300 to $400 or more. 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.
• Make extra principal payments. Once you refinance your mortgage, make extra payments as often as possible to pay off your loan earlier. One way to do this is by making biweekly payments. You’ll end up making one extra payment each year (13 instead of 12) and can reduce the time it takes to pay off your mortgage by a few years. Another strategy is to pay a set amount each month on top of your mortgage payment.