How a no-closing-cost refinance works

What is a no-closing-cost refinance?

A no-closing-cost refinance saves you closing costs upfront — typically
2% to 6% of the total loan amount.

Normally, mortgage refinancing loans require you to pay various closing costs, such as processing fees, appraisal fees and attorney fees. Usually, you have to pay these upon closing on the loan.

A no-closing-cost refinance is a type of mortgage refinance loan that doesn’t charge you any of these at closing.

However, you aren’t off the hook for these expenses — the lender will usually include them in your total refinancing loan balance or raise the interest rate to compensate.

Still, no-closing-cost refinances prevent you from having to pay these costs immediately. This can be helpful for homeowners who are tight on cash and refinancing to lower their monthly payments or who want to save their money for other spending goals.

On the other hand, regular refinances might be a better option if you can afford the closing costs comfortably and just want to cut your monthly payment as much as possible.

No closing cost vs. “rolled” closing costs

A no-closing-cost loan and rolled-closing-cost loan are the same thing. No-closing-cost loans don’t truly get rid of closing costs; instead, the lender rolls the costs into your loan balance or, sometimes, your interest rate. Thus, you may hear lenders refer to these costs as “rolled” closing costs.

How much are closing costs on a refinance?

Closing costs are an assortment of fees and expenses you’ll pay to close on a refinancing loan. As a general rule, these tend to be 2% to 6% of the total loan amount.

For example, if you’re refinancing a mortgage with a $100,000 remaining balance, your closing costs could range from $2,000 to $6,000, depending on your lender and what services are involved in closing the refinancing loan. Some fees are negotiable, while others are not.

Here are some negotiable closing costs for refinancing loans:

• Attorney fees
• Application fees
• Origination fees
• Prepayment penalties

Here are some refinancing closing costs you usually cannot negotiate:

• Appraisal fees
• Recording fees
• Credit report fees
• Property taxes

In general, any fees set by the government are nonnegotiable. Fees that the lender charges usually have some wiggle room.

Pros and cons of a no-cost refinance

Although you still pay closing costs in some form on no-cost refinancing loans, there are some benefits to rolling everything into one sum of money — but there are some drawbacks to consider as well.

Benefits of refinancing

• You save money upfront: No-closing-cost refinances save you thousands of dollars upfront that you can put toward other uses.
• Quicker break-even point: The break-even point is the point at which your monthly savings from refinancing outweigh the closing costs. By rolling fees into your loan, you effectively begin breaking even immediately.
• Faster time to close: When you roll closing costs into your loan, the lender takes care of them, then you pay the lender back. Less work on your part to pay for the services involved in closing may accelerate the time it takes to close on the loan.

Drawbacks of refinancing

• Higher monthly payment: Your lender will either roll the costs into your mortgage balance or increase your interest rate, resulting in higher monthly payments.
• More interest costs: You will pay more interest over the life of the loan and possibly a higher total amount than if you had paid closing costs upfront.
• Private mortgage insurance (PMI): Rolling closing costs into your loan may cause your loan-to-value (LTV) ratio to fall below 80%. For most conventional mortgages, you’ll be required to pay PMI until you gain at least 20% equity.

How to avoid closing costs when refinancing

Lenders can offer no-closing-cost loans because they can roll the costs into the loan balance or interest rate. This saves you money upfront but may cost you more in the long run. There are a couple of tactics you can use to reduce your closing costs in the first place.

First, you can ask the lender to waive some of the fees. If you’re a loyal customer who makes payments on time, the bank may be willing to cut you a break to keep you as a customer. In particular, you may be able to get the lender to waive your appraisal fee if you had an appraisal performed recently.

You can also comparison-shop for the best deals on third-party services to cut those fees, then negotiate the closing costs downward.

Aside from those tactics, raising your credit score and reducing your debt-to-income ratio will lead to a better interest rate, which helps you offset the increased loan balance or interest rate on a no-closing-cost refinancing loan.

Bottom line: Should you get a no-closing-cost refinance?

A no-closing-cost refinance loan can be a beneficial financial option for the right kind of homeowner. If you don’t have much cash on hand, or if you’d rather put the cash you do have to a different use, the no-closing-cost option may be your best bet. You just have to make sure you’re still able to accomplish your original refinancing goals — whether they include a lower monthly payment, a longer term or something else.

No-closing-cost refinancing is not for everybody. The payment amount is higher than if you pay the closing costs upfront. Homeowners focused on minimizing their monthly payment above all else might do better to pay the closing costs upfront and secure a smaller loan with a lower rate.