Understanding no-closing-cost refinances: A complete guide

Refinancing your mortgage can help you achieve many different goals, whether that’s lowering your monthly payment amount, saving money on financing costs, or tapping into your home equity to borrow funds. However, there are many factors you need to weigh in order to know whether refinancing is right for you. For many people, one of the biggest obstacles is the closing costs, which can run several thousands of dollars. 

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That said, it is possible to refinance a mortgage with no closing costs. The term is a bit misleading, however, since you’ll pay for the closing costs in other ways. This can impact your long-term financial plans, so it’s a good idea to know how a no-closing-cost refinance works and whether it’s the right choice for your family. 

What are cash-out refinance closing fees? 

There are many moving parts when it comes to securing a mortgage, whether you’re purchasing a new home or — in this case — using it to pay off your first loan. In general, you can expect to pay between 2% and 6% of your mortgage balance as closing costs, which are composed of a range of separate charges depending on where you live and your lender’s requirements. These charges could include: 

• Credit report: $10 to $100
• Appraisal fee: $300 to $700
• Recording fee: $25 to $250
• VA funding fee: 0.5% of the loan amount
• Application fee: $75 to $300
• Discount points: 1% of the loan amount
• Title search fees: $700 to $900
• Loan origination fee: 0.5% to 1% of the loan amount
• Attorney review fees: $500 to $1,000
• Home inspection fee: $175 to $350
• Document preparation fee: $50 to $600

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In addition, you may have to pay an additional monthly fee for mortgage insurance if your new loan-to-value (LTV) ratio exceeds your lender’s benchmark, commonly 80%. For example, if you had 22% equity in your home before taking out your mortgage refinance loan, you may not have had to pay an extra monthly mortgage insurance fee. 

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But if your new loan lowers the amount of equity you have in your home to 18%, you may have to pay an additional monthly fee for mortgage insurance. This can easily happen with a cash-out refinance loan, or for no-closing-cost refinance loans due to the way they’re structured. 

What is a no-closing cost refinance?

Many people look for ways of avoiding closing costs, especially since not everyone has a few spare thousand dollars lying around. It is technically possible to find no-closing-cost refinance loans, but the name is a bit of a misnomer. There are no upfront closing costs, but lenders have creative ways to get you to pay in other ways. 

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Some lenders allow you to refinance with no closing costs by rolling those fees into your new loan balance. In this sense, you’re basically just taking out a cash-out refinance loan and using the loan proceeds to pay your closing costs. Your new loan will be for a larger amount than you currently owe, the difference being due to the closing costs that your lender rolled into your new loan. 

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Other lenders will pay the closing costs for you, but compensate by charging a higher interest rate. This means you may be paying additional financing charges with each monthly payment for the remainder of your loan. 

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Either way, a no-closing-cost refinance is never truly that; you’ll simply pay the closing costs indirectly in other ways. 

The pros and cons of a no-closing cost refinance

Pros

• Lower upfront cost
• Reserves money for other purposes
• Potential to get additional cash back
• Smaller monthly payments may be possible

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Cons

• Credit score and income limitations
• Increases long-term borrowing costs
• Potential for higher monthly payments
• May charge extra for mortgage insurance
• Extends time period before you pay off home

How much does it cost to refinance with no closing costs?

It’s helpful to think of refinancing your mortgage as buying a new home loan. Just as you might calculate the cost of different cruise options for your next family vacation, it’s also a good idea to compare the cost of your different mortgage options. Depending on your goals, focusing on your loan costs — both in the short term and in and long term — can help indicate whether a no-closing-cost refinance is a good idea or not. 

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Try using a mortgage refinance calculator to estimate what your new monthly payment amount and your total interest costs will be. You can adjust your mortgage rates higher, or enter your closing costs as a cash-out amount, depending on how your lender will be shifting your closing costs around. 

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For example, let’s say you’re currently paying $1,800 per month on a $250,000 home loan, at a 7% interest rate. You then refinance for a new 30-year loan at a 6% interest rate and get $15,000 worth of cash out (to account for the closing costs). In this scenario, your monthly payments will be $211 less, but because you extended your loan term and borrowed more, you’ll pay nearly $44,000 more in interest over the life of the loan. 

When is a no-closing-cost refinance a good idea?

No-closing-cost refinances work by shifting your short-term costs (closing fees) into long-term expenses (more interest charges). 

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If you plan to stay in your home (or at least keep your loan) for a long time, then a no-closing-cost refinance may not always make financial sense. It’s likely that you’ll end up paying more over the long run. 

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However, if you have plans in the near future to sell your home as a real estate investment or to move into a new home, then a no-closing-cost refinance may work out better. You won’t be paying those increased interest charges over the long term in this case. If your lender offers to roll your closing costs into your new loan balance, however, you’ll have less equity left after paying off the mortgage when you sell your home. 

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Additionally, if now is a good time to refinance your mortgage in general — but you just don’t have extra cash on hand — then a no-closing-cost loan may still make sense in some cases. If you’re currently in a low-interest-rate environment and you’ve recently had negative marks fall off your credit report, for example, then a no-closing-cost loan may still make sense.

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Again, here’s a good case where using a mortgage refinance calculator can help you. If we continue our example from above, but instead say you’re swapping a 7% interest rate out for a much lower 5% interest rate — 2% less —  then you’d instead end up saving nearly $16,000 over the life of your loan, even after accounting for the closing costs that were rolled into your no-closing-cost refinance. 

Final thoughts: Refinancing in today’s economy

It’s important to explore all of your options when it comes to home equity financing. A no-closing-cost refinance may be in your family’s best interest, but if you want to preserve your current mortgage in place, consider these other options:

• Home equity loan: A lump-sum loan perfect for specific uses such as consolidating your debt or paying for home upgrades. 
• Home equity investment: A lump sum of funds in exchange for a future portion of your home’s equity, which requires no monthly payments until the end of the term. 
• Home equity line of credit (HELOC): A line of credit you can borrow against whenever you need, such as during an emergency or to pay for smaller, more frequent costs.

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If you’re interested in seeing how much you could get with a home equity investment, check your offer in under two minutes here.