No-Closing-Cost Refinance: Is It a Real Thing?

Written by Kim PinnelliUpdated: 28th Dec 2021
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Closing costs can make it impossible to refinance. If you don’t have 3% – 5% of your loan amount in liquid reserves, you may think you can’t refinance, but there’s an option. It’s called the no-closing-cost refinance.

While it sounds like an amazing option, it’s not right for everyone. Here’s everything you need to know about no-closing-cost refinance.

What Is No-Closing-Cost Refinance?

A no-closing cost refinance is just what it sounds like – you can refinance without paying anything out of pocket.

It sounds like a dream come true. Who wouldn’t sign up, right?

Not so fast. It’s not what it seems like. There’s no free lunch, so to speak. Mortgage lenders need to make money to stay in business, so how could they just ‘give away’ a refinance?

They don’t. Here’s how it works.

How Does No-Closing-Cost Refinance Work?

Lenders make it seem like you are getting a refinance for nothing, but you pay for it one way or the other.

The most common way lenders offer a no-closing-cost refinance is by increasing your interest rate. For example, if you could get a regular refinance paying closing costsat 4%, they might charge you 4.5% with no closing costs. Suddenly that refinance isn’t free – you’ll pay 0.5% more in interest every month for the loan term.

For example, if you borrowed $240,000 for 30 years, the 0.5% difference in rate would equal $25,290 more in interest. That’s a lot more than you’d pay in closing costs.

Another way lenders offer a no-closing-cost refinance is by tacking the closing costs onto your loan. Let’s use the same $240,000 loan.

If closing costs are $5,000, the lender will increase your mortgageto $245,000, wrapping the closing costs into your loan. It’s a ‘no-closing-cost loan’ because you didn’t pay anything out of pocket at the closing.

What Are Refinancing Closing Costs?

Every lender charges different refinancing closing costs, but here are the most common.

Appraisal Fee

Lenders need an appraisal to determine your home’s value. They can’t fund a new loan until they know if there’s enough collateral in the home. The average appraisal costs $450 – $500.

Origination Fee

Not all lenders charge origination fees, but it’s a percentage of your loan amount if they do. Typically, lenders charge 1 – 2 points or 1% – 2%. If you borrow $240,000, your origination fee would be $2,400 – $4,800.

Title Fees

Lenders hire atitle company to research the chain of title on your home. The title search ensures there aren’t any outstanding liens, encumbrances, or anyone else that could claim a legal stake in your home.

The title search may cost less than when you bought the home since they already did a full title search when you bought it, but you’ll still pay for the services.

You’ll also pay title insurance for the new lender because the title insurance you paid for when you bought the home covered your old lender.

VA Funding Fee

If you’re a veteran and using your VA home loan benefits, you’ll pay a funding fee for using your benefit. The type of refinance you apply for determines your VA funding fee. If you’re refinancing to lower your rate or change your term, you’ll pay 0.5% of the loan amount.

If you’re taking cash out of the home’s equity, though, you’ll pay 2.3% of the loan amount for the VA funding fee.

Mortgage Insurance

If you have less than 80% equity in your home and/or you take out a government loan(except a VA loan), you’ll pay mortgage insurance. You may have to pay 2 months upfront for reserves, which can add to your closing costs.

Discount Points

Discount points are optional, but they help lower your interest rate. If an online mortgage lenderquotes you 4%, for example, and you really wanted a 3.5%, you may be able to ‘buy it down.’

Discount points are a percentage of your loan amount. 1 point equals 1% of the loan amount. Most lenders don’t charge more than 1 point, but it varies by lender and situation.

What Are the Advantages of No-Closing-Cost Refinance?

The no-closing-cost refinance has several advantages, including:

  • You’ll spend less money out of pocket at the closing
  • If you aren’t staying in the home much longer, you could come out ahead (usually less than 5 years)
  • You can tap into your home’s equity without paying closing costs

What Are the Disadvantages of No-Closing Cost Refinance?

Like any personal finance decision, there are disadvantages to the no-closing cost refinance too:

  • If you’re in the home long-term, you’ll pay excessive interest that exceeds the closing costs
  • You might increase your loan amount if the lender wraps the costs into your loan
  • You’ll likely pay a higher interest rate

When Does No-Closing-Cost Refinance Make Sense?

There is a time and place for the no-closing-cost refinance.

It makes the most sense for homeowners who will only live in the home for 5 years or less. If your interest rate is higher, it won’t affect you for the long term, and you’ll move before you pay more in interest than the closing costs would have cost you.

Sometimes it makes sense if you are making home renovations. The interest rate on a first mortgage is usually lower than a HELOC loan. If you can get a low-interest rate and pay no closing costs, you’ll have more money to renovate your home.

Is No-Closing-Cost Refinancing Safe?

A no-closing-cost refinance can be safe, but just make sure it makes sense. Do the math and see how much interest you’ll pay over the life of the loan beyond what you’d pay with your current loan. Compare it to the closing costs you won’t pay. If you aren’t saving any money, it’s not worth it to take the no-closing-cost loan.

If you find a loan that makes financial sense, though, you’ll come out ahead in the deal and save money on your mortgage.

>> More: What Closing Costs Are Negotiable?

Bottom Line: No-Closing-Cost Refinance

Read the fine print and understand the full implications of a no-closing-cost loan. Every lender does it differently.

Find out if you’re paying a higher interest rate or if the lender will increase your loan amount. Read your Loan Estimate carefully and ask questions if you don’t understand how it works.

The phrase ‘no closing costs’ sounds amazing, but make sure you understand what’s going on behind the scenes to ensure it’s the right choice.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.