How to Get a No-Closing-Cost Refinance
A no-closing-cost refinance may be worth considering if you’re short on cash or prefer not to dip into your savings account to cover closing costs. It’s also a good option if you plan to move within the next few years.
Don’t let the name fool you, though — a no-closing-cost refinance isn’t free. Understanding how it works can help you decide if this short-term benefit is worth the long-term cost.
Key takeaways
- No-closing-cost refinances aren’t actually free of costs. You’ll either roll the closing costs into your loan amount or accept a higher interest rate. Both options result in higher long-term costs than you’d have if you paid your closing costs upfront.
- No-cost refinances work best for short-term situations. They won’t save you money over the long term, but they may make sense if you’re planning to sell your home soon, need immediate monthly savings or want to avoid depleting your savings.
- Taking a higher interest rate will cost significantly more over time. Choosing a higher interest rate option is the most expensive path you can take, and will likely mean paying tens of thousands of dollars more in interest over the life of the loan.
What is a no-closing-cost refinance?
A no-closing-cost refinance allows you to replace your current mortgage with a new one, minus all the fees. Instead of bringing cash to the closing table, you’ll have the option to either:
- Roll your closing costs into your loan amount, or
- Have your lender cover the closing costs and, in return, increase your interest rate
A no-cost refinance doesn’t mean you aren’t paying those closing costs — you’re just choosing to finance them instead. As a result, your monthly payments and total interest paid will be higher for the life of the loan than if you had paid those costs with cash.
How much does it cost to refinance a mortgage?
Traditional mortgage refinance closing costs can range from 1% to 6% of your loan amount, but a no-closing-cost mortgage allows you to refinance with no out-of-pocket expense.
That can be a big relief for homeowners who are short on cash, especially if you have a larger loan. For example, if you’re refinancing $300,000 and have 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
Can I get a no-closing-cost cash-out refinance?
Any refinance that involves borrowing more than you owe on your current mortgage is technically a cash-out refinance. However, if the amount you borrow is only larger by the amount of your closing costs, it’s considered a no-closing-cost refinance.
If it’s larger by roughly the amount of your closing costs, but with a little extra cash thrown in to cover small expenses, it’s considered a limited cash-out refinance. If you choose a conventional loan, your cash may be limited to 2% of the new loan balance or $2,000, whichever is less.
If you want to access a significant amount of cash over and above your current mortgage balance plus closing costs, the loan becomes a regular cash-out refinance and the additional cash is drawn from your home equity.
How a no-closing-cost refinance works
A no-closing-cost refinance eliminates the upfront costs of refinancing. However, in exchange, you’ll have higher monthly payments and pay more in total interest.
The best way to understand how a no-closing-cost refinance works is to see the numbers in action. We’ll compare the two options — rolling your closing costs into the loan amount and taking a higher mortgage rate — and show how they stack up against a traditional refinance.
No-closing cost refinance example
For our example, let’s imagine that you still owe $300,000 on your current mortgage and would like to refinance without paying the $5,000 in closing costs upfront. Here are your options compared to a traditional refinance:
| No-closing-cost refinance with higher loan amount | No-closing-cost refinance with higher interest rate | Traditional refinance with closing costs | |
|---|---|---|---|
| Loan amount | $305,000 | $300,000 | $300,000 |
| Interest rate | 6.86% | 7.36% | 6.86% |
| Total cost paid at closing | $0 | $0 | $5,000 |
| Monthly payment (principal and interest) | $2,000.58 | $2,068.96 | $1,967.78 |
| Total interest costs | $415,207.68 | $444,825.38 | $408,400.99 |
The table below shows the dollar cost and savings of each no-closing-cost option, compared to paying the closing costs with cash.
| No-closing-cost refinance with higher loan amount | No-closing-cost refinance with higher interest rate | |
|---|---|---|
| Extra monthly payment cost | $32.80 | $101.18 |
| Extra lifetime interest cost | $6,806.69 | $36,424.39 |
Here are the important takeaways:
- Your monthly payment and total interest charges are highest if you choose the no-cost refi with a higher interest rate.
- Your monthly payment and total interest charges are lower for the no-cost refi with the higher loan amount, but you’ll 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 extra home equity in the refinance.
- You’ll sacrifice some home equity if you choose the option that increases your loan amount, since any “extra” you borrow (over and above your original mortgage’s payoff amount) will be secured by your home equity. Less home equity means you’ll make less profit when you sell your home in the future — and in some cases, it could mean having to pay for private mortgage insurance (PMI).
Tip: You can customize your monthly payment
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.
Who offers a no-closing-cost mortgage refinance?
Recommended no-closing-cost mortgage lenders
No-closing-cost refinance pros and cons
| You won’t have to wait to recoup your closing costs You won’t use up additional home equity if you choose a no-closing-cost refinance with a higher rate You can get a refinance rate that’s likely lower than home equity loan rates You’ll free up cash you can keep in savings or use for other financial priorities | Your monthly payment will be higher You'll pay more in total interest charges You’ll use up home equity if you choose a no-closing-cost refinance with a larger loan amount You could end up paying for mortgage insurance if you tap too much home equity |
When a no-closing-cost refinance makes sense
- 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 outgrowing your home and plan to sell soon, a no-closing-cost refinance allows you to save money without waiting 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 your cash reserves over time.
How to get the best deal on a refinance mortgage with no closing costs
- Boost your credit score. The better your credit score, the better your chance of getting the lowest 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 credit score of 780 or higher to get the best rate.
Monitor your credit score for free with LendingTree Spring. - 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 $500. 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.
- Avoid taking cash out. If you don’t have a good reason to take cash out when refinancing, it makes more sense not to — cash-out refinance rates are typically more expensive than rate-and-term refinance rates, since lenders view them as more risky.