Refinancing can help you lower your monthly payments, pay off your mortgage sooner, or even cash out your home’s equity to pay off higher-interest debt or make home improvements.
But one thing you should be clear on: refinancing isn’t free.
Just like with a standard mortgage, you can’t refinance a mortgage without paying closing costs, which can easily be 2%-5% of the loan’s value. That’s thousands of dollars the average homeowner needs to refinance.
Still, some lenders are known to market no-closing cost, or no-cost, refinancing. But the name doesn’t exactly mean what it says. The term “no closing cost” isn’t 100% correct, says Adam Spigelman, vice president of portfolio retention at the New Jersey-based Planet Home Lending.
There are always third-party expenses on a loan, and while there are ways to roll those costs into your loan, that’s not the same thing as free. A no-cost mortgage isn’t eliminating the fees, it’s simply changing how you pay for them.
What Is a No-Closing-Cost Refinance?
“Closing costs” is a blanket term for all the fees you’ll pay for a mortgage. This includes attorney, appraiser, inspector, lender and/or broker fees. No matter what type of mortgage you choose, there are always closing costs to pay. But for some of those costs, you can have a say in when and how they are paid.
A mortgage refinance marketed as no-cost can reduce your upfront out-of-pocket costs to nothing. But that simply means you’ll pay for closing costs in the loan itself.
This is done in two ways: by adding the closing costs to your mortgage, or through a higher refinance rate.
A no-closing-cost refinance doesn’t eliminate closing costs. It simply adds them to the loan, and can end up costing you more in the long run.
Average Closing Costs When Refinancing
Your closing costs will vary depending on your loan balance, the type of refinance, and even where you live. But you should expect the fees to run from 2% to 5% of your loan amount.
In 2020, the average mortgage loan balance increased to roughly $208,000. So a typical refinance would have fees in the range of $4,000 to $10,000. The specific fees you pay, and what they’re called, will vary by state, but the most common fees are:
The lender will want to verify the property’s value to get an accurate loan-to-value ratio (LTV). Your bank or mortgage lender will have a professional real estate appraisal completed on your property, but you’ll have to pay for it. Appraisal fees run anywhere from $300 to $600.
There are specific types of refinance loans that may not require an appraisal if certain conditions are met, such as an FHA streamline refinance.
When you take out any home loan, you’ll need to purchase title insurance and have a title search done to ensure the property’s title is free of defects. Title companies charge $500 to $1,000. But this is a fee you can usually shop around for to find the best deal.
Lender fees such as loan origination fees and discount points. These fees are typically charged as a percentage of the loan balance and you should comparison shop to get the best deal. Discount points, or mortgage points, are fees you pay upfront in exchange for a lower interest rate. A discount point is usually 1% of the loan amount and will often reduce your refinance rate by one quarter of a percentage point. Loan origination fees are typically 1.5% or less.
Your refinance closing costs may include a variety of other fees such as:
- Survey fee
- Recording fee
- Inspection fees
- Attorney or settlement fees
- Credit report fee
These fees range in cost from $25 to $50 for a credit report fee to $500 to $1,000 for settlement or attorney fees. Depending on what state and city your home is located in, some of these fees may not apply to your refinance.
Other Costs Associated With The No-Closing-Cost Refinance
Taking out a home loan is never free. With a no-closing-cost refinance you’ll pay for the loan in one of two ways, with a higher loan balance or a higher interest rate.
Higher loan balance
If your closing costs are $6,000 and your mortgage is $200,000, you could refinance for $206,000 by rolling the extra costs into your new mortgage. In this scenario, your interest rate doesn’t increase, but you’ll have larger monthly payments because your principal is bigger.
Higher refinance rate
The other option is to accept a higher mortgage rate in exchange for a lender credit to cover closing costs. These lender credits function in a similar way to discount points, but in reverse. Instead of paying more upfront to save on interest in the long term, you’ll pay less upfront and pay more in interest over the long haul.
This is a better strategy if you know you won’t be staying in the home that long.
When to Choose a No-Closing-Cost Refinance
A no-closing-cost refinance can make sense depending on a variety of factors, like your current mortgage rate and how long you plan to stay in your home. The key question to ask yourself is: Will a no-closing-cost refinance improve your financial situation more than other options?
Looking over mortgage rate history, now is a great time to lock in an ultra-low rate. And if you don’t have the cash to pay for a refinance, a no-closing-cost loan is one potential solution. This type of refinance also gives you the opportunity to use your cash for other things, like paying down high-interest debt or building an emergency fund.
At the end of the day, if you’re refinancing to save money, do the math for all of the options to see what makes the most sense. Nadia Alcide, mortgage loan professional with Mortgage Biz of Florida, recommends you sit down with your mortgage professional to calculate exactly when you will break even.
With a no-closing-cost loan, the longer you keep it, the more it will end up costing you compared to other options. So if you plan on moving before your break even point, then a no-closing-cost refinance makes more sense.
When A No-Closing-Cost Refinance Doesn’t Work
Compared to a traditional mortgage refinance, a no-closing-cost loan gets you savings upfront by lowering your out-of-pocket costs. But over the long term, you can end up paying more interest with a no-closing-cost loan.
Accepting a higher interest rate, instead of adding the closing costs to the loan can add up over time. Just a 0.5% rate increase on a $200,000 30-year mortgage could cost roughly $20,000 more in interest over the life of the loan. So if you’re planning on keeping the loan for the full repayment term, you could end up paying several times the amount of the upfront fees in additional interest.
If you incorporate closing costs into the mortgage refinance, you’re paying those fees back each month, plus interest. If you roll $8,000 in closing costs into a $200,000 30-year loan at 3%, you’ll pay an extra $4,300 in interest over the life of the loan, and increase the monthly payment by $33.
So a no-closing-cost loan doesn’t save as much if you’re planning on staying in your home for the long term.
Is A No-Closing-Cost Refinance Right For You?
In order for a no-closing-cost refinance to be right for you, you should consider your goals. And depending on what you’re trying to accomplish, there may be better options available.
If you’re looking to reduce your refinance costs, you can shop around for the best rates and compare fees. You should start your search with your current lender. Oftentimes your current lender will offer good deals because it’s motivated to keep you, Spigelman says. For example, if you stick with your current lender, it may be willing to waive the appraisal, which saves you $300 to $600.
While every lender charges closing costs, there’s some flexibility with certain fees. Once you have a few offers in hand, you may be able to use competing offers to negotiate the rates and fees down. Be sure to ask about the purpose of each fee and whether or not it can be reduced or waived entirely.
If you want to pay off your mortgage as quickly as possible, a no-closing-cost refinance isn’t the best choice. Alcide recommends looking into not only lowering your rate with a refinance, but also shortening your term. If you switch from a 30-year loan to a 15-year loan you will likely have a higher monthly payment, but you’ll pay off your mortgage much more quickly. This is an excellent way to save on the overall interest you pay.
You can use our mortgage calculator to compare the monthly payments and the interest you’ll pay for each type of refinancing. You could also have a lender run the numbers for you, but, keep in mind, not every lender offers a no-closing-cost refinance option.
Pros and Cons of a No-Closing-Cost Refinance
A no-cost refinance is a potentially great way to reduce your interest rate without paying thousands of dollars out of pocket. But the fees that you’re not paying will either be added to your loan balance or be factored into a higher interest rate.
So not paying upfront is a trade off, and you should always look at the bigger picture. Increasing your loan balance could have other consequences, such as a higher interest rate and could make it harder to get rid of private mortgage insurance (PMI).
- No out-of-pocket costs
- Can save you more if you might sell the home in the short term
- Higher loan balance and loan-to-value ratio
- Potentially higher interest rate
- Can be harder to get rid of PMI