Mortgage lenders offer refinancing options including no-closing cost refinance loans; as Forbes points out, this actually means that some or all closing costs are paid by the lender in exchange for the borrower accepting a higher mortgage rate. No-cost refinance quotes vary depending on which costs lenders offer to pay. While some lenders pay only lender fees and costs, others may pay all closing costs. Homeowners shopping for refinance loans need to understand which costs are paid by the mortgage lender for each quote received.
Closing Costs 101: Who Charges and Who Pays?
Closing costs for a refinance include lender costs, prepaid charges and third-party vendor fees.
- Mortgage lender fees can include loan origination, loan processing fee, document preparation and other fees. It doesn't matter what they are called; it's the total that matters.
- Prepaid items, also called prepaids, include accrued mortgage interest, property taxes, hazard insurance, HOA fees and mortgage insurance if applicable. Most prepaids are not actually loan costs; they are costs associated with homeownership – like property taxes, insurance and HOA dues. Mortgage lenders require accrued interest to be paid at closing for all mortgage refinance loans; the other items may be prorated and paid at closing in cases where the mortgage lender collects for hazard insurance, taxes and mortgage insurance from homeowners as part of their monthly mortgage payments and pays them on behalf of the homeowner.
- Third-party fees and costs for refinancing usually include charges for title insurance, a home appraisal and document recording fees.
While mortgage lenders reduce or eliminate upfront closing costs by offering no-cost mortgages, homeowners choosing a no-cost loan ultimately pay for these costs over time in extra mortgage interest.
No-Cost Refinance Offers: Shop and Compare
No-cost refinancing allows homeowners to reduce or eliminate the need for paying costs at closing, but not all no-cost refinance offers are the same. The Federal Trade Commission advises consumers to request multiple loan quotes and to review estimated closing costs line by line. When considering no-cost refinance offers, it's important to verify with each prospective lender which closing costs will be paid. There is an advantage in comparing no-cost refinancing quotes from lenders that come with no lender fees, as it's only necessary to compare the mortgage rates quoted by each lender. Homeowners short of cash can also benefit from refinancing with a loan offering lender-paid closing costs.
There is a definite relationship between the mortgage rate and costs. For example, a lender might offer these three options:
- Interest rate: 3.875 percent, mortgage cost: two percent of the loan amount
- Interest rate: 4.00 percent, mortgage cost: one percent of the loan amount
- Interest rate: 4.25 percent, mortgage cost: zero
The longer you plan to keep your mortgage, the more a no-cost loan will cost you. In the example below, the no-cost loan is the cheapest for five years, but the most expensive over 15.
Homeowners can estimate monthly payments and compare refinance quotes by using refinance calculators. While estimates can help homeowners evaluate refinancing options, their actual refinancing costs can vary due to changing mortgage rates and actual costs due at closing.
Choosing a no-cost refinance option depends on homeowner needs and preferences and variables including changing mortgage rates. LendingTree's network of lenders can answer questions and help homeowners find no-cost refinance options best matched to their circumstances.