How a No-Closing-Cost Refinance Works

What is a no-closing-cost refinance?

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.

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

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 a 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.

No-closing-cost vs. traditional refinance

With a no-closing-cost refinance, you avoid paying fees upfront. Instead, the lender covers those costs by charging a slightly higher interest rate. This keeps your cash in hand but increases the total interest you pay over time.

A traditional refinance usually offers a lower rate, but you’ll pay closing costs at closing or add them to the loan. While this raises your initial cost, the lower rate can lead to bigger savings if you keep the loan long enough.

The key factor is how long you plan to stay in the home. Short-term homeowners often benefit from no-closing-cost refinances. Long-term homeowners may save more by paying closing costs up front and locking in a lower rate.

Below is a simplified example comparing the two refinance options for a $250,000 loan over 30 years.

» READ MORE: How to refinance a mortgage

Step-by-step process for a no-closing-cost refinance

A no-closing-cost refinance works similarly to a traditional refinance, but there are a few extra steps you’ll need to take. Here’s how the refinancing process works from start to finish.

1. Shop lenders and request no-closing-cost quotes: Ask multiple lenders for written estimates that clearly show lender credits or other ways closing costs are covered, and confirm the interest rate, monthly payment and total credits included.
2. Compare loan estimates carefully: Focus on the interest rate, lender credits and total closing costs, and remember that higher credits usually come with a higher rate.
3. Choose an offer and apply: Submit your loan application along with required documents like pay stubs, bank statements and tax returns, and lock your rate once you’re comfortable with the terms.
4. Complete appraisal and underwriting: The lender orders an appraisal and reviews your financial information, so respond quickly to requests to keep the process moving.
5. Review final disclosures: Read the Closing Disclosure closely to make sure lender credits fully offset closing costs and that you’re not expected to bring cash to closing.
6. Close the loan: Sign the final paperwork, keeping in mind that a no-closing-cost refinance typically requires little to no money out of pocket at closing.
7. Confirm post-closing details: Verify your first payment date and amount, keep copies of all documents and confirm that your old loan has been paid off.

Mechanics of lender credits vs. higher interest rates

No-closing-cost refinances usually work in one of two ways. Understanding the mechanics helps you choose the right trade-off.

Option 1: Lender credits paired with a higher rate

• The lender gives you credits to cover closing costs.
• In exchange, you accept a slightly higher interest rate.
• Little or no cash is due at closing, but you’ll pay higher monthly interest over time.

Option 2: Costs rolled into the loan balance

• Closing costs are added to your principal instead of being paid up front.
• Your rate may be similar to a traditional refinance.
• You’ll have a higher loan balance and more interest paid on those costs.

With lender credits, you avoid paying $5,000 at closing but pay a higher rate each month. Rolling costs into the loan avoids upfront cash but increases what you owe.

Loan types eligible for no-closing-cost refinance

Most mortgage loan types are eligible for no-closing-cost refinancing. Of course, you'll need to determine if it makes sense to roll your closing costs into your specific refinanced loan.

Conventional loans

A conventional mortgage is not a government-backed mortgage; rather, these loans are based on terms set by the Federal Housing Finance Agency (FHFA) and the organizations it oversees, Fannie Mae and Freddie Mac.

To qualify for a conventional loan, you will typically need a higher credit score and lower debt-to-income (DTI) ratio than some other loan types require.

Federal Housing Administration (FHA) loans

An FHA loan is popular among first-time homebuyers because these loans are typically available to people who don't meet the requirements for conventional mortgages. These loans are attractive because they are usually available to those with lower credit scores or limited credit history and require a lower down payment than other loans.

These loans are known for having a lower closing cost. If you have an FHA mortgage you want to refinance, it may be good to opt for a no-closing-cost refi, since you may avoid rolling a high closing cost into your new mortgage.

VA loans

A VA loan is backed by the Department of Veterans Affairs and is only available to military members and their families. These loans do not require a down payment and typically have low interest rates.

If you refinance a VA loan, a VA funding fee is likely required, along with any other related closing cost fees. However, it may still be a good idea to refinance if you can get a much lower interest rate or want to do a cash-out refinance.

USDA loans

USDA loans are available via the U.S. Department of Agriculture and must be used to purchase properties in eligible rural areas. If you want to refinance with the USDA, your existing mortgage must be a USDA loan.

Jumbo loans

A jumbo loan is a loan of over $832,750 on a single-family home. To qualify for a jumbo loan, most lenders require a 20% down payment, a high credit score and a low DTI ratio.

Fees and interest rates may be higher on a jumbo loan than on other types of loans. This is something to keep in mind when deciding if you want to roll your closing costs into your refinanced mortgage, as you'll pay interest on that cost.

Home equity loans

If you currently have a home equity loan, you can refinance your home equity loan to take advantage of lower interest rates or to set better loan terms. You'll likely need 15% to 20% equity in your home to be able to refinance for a new loan.

Closing costs on a new home equity loan typically run from 2% to 5% of the total cost. Keep this in mind if you want to roll this cost into your new loan amount, because you will pay interest on the full amount in the long run.

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 non-negotiable. Fees that the lender charges usually have some wiggle room.

How to calculate the break-even point for a no-closing-cost refinance

The break-even point shows how long it takes for the savings from a traditional refinance to outweigh its upfront closing costs. This helps you compare it directly with a no-closing-cost refinance. Here’s how to do it step by step.

1. Find your monthly savings. Subtract your new monthly payment from your current one.
2. Total the closing costs. Add up all closing costs you’d pay with a traditional refinance.
3. Divide costs by savings. Divide the closing costs by your monthly savings.

For example, say your current payment is $1,540 and your new payment will be $1,460 with a no-closing-cost refinance. That’s a monthly savings of $80. If your total closing costs are $5,000, then:

$5,000 / $80 = 62.5 months

That means your break-even point is about 63 months or just over five years.

» READ MORE: How much does it cost to refinance?

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.

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 few tactics you can use to reduce your closing costs in the first place:

1. 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.
2. Use competitor rates as leverage. You can comparison-shop for the best deals on third-party services to cut those fees, then negotiate the closing costs downward.
3. Improve your financial health. Raising your credit score and reducing your DTI 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.

Should you get a no-closing-cost refinance?

A no-closing-cost refinance can make sense if you want to refinance without paying thousands of dollars upfront. This option is often a good fit if you’re short on cash, prefer to keep your savings intact or expect to sell your home or refinance again within a few years.

It can also work well if refinancing helps you meet a specific goal, such as lowering your monthly payment compared to your current loan or improving short-term cash flow, even with a slightly higher interest rate.

However, this option isn’t ideal for everyone. Because the lender usually charges a higher rate to cover closing costs, your monthly payment and total interest paid over time may be higher. If your main goal is the lowest possible payment or maximum long-term savings, paying closing costs upfront to secure a lower rate may be the better choice.

Before deciding, compare offers side by side and check how long it would take to break even. If you plan to keep the loan past that point, a traditional refinance may save you more in the long run.

FAQ