Should I consider a no-closing-cost refinance?

A woman seated in her kitchen researches a no-closing-cost refinance on her laptop.Image: A woman seated in her kitchen researches a no-closing-cost refinance on her laptop.

In a Nutshell

Some lenders may offer no-closing-cost refinances. But that usually means the lender charges you a higher interest rate or tacks the closing costs onto your mortgage, resulting in a higher total loan.
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If you’re thinking about refinancing your mortgage, you might wonder whether you can get a no-closing-costs refinance.

It’s possible to refinance a mortgage without paying out-of-pocket costs at closing, but you generally end up paying more in other ways. For instance, a lender may pay the closing costs but increase the interest rate you pay on the loan. Alternatively, lenders can roll the closing costs into your loan principal so that you have a larger amount to repay.

But refinancing without paying upfront closing costs isn’t always an option. The choices you’ll have depend on the type of refinance and your lender’s requirements.

How does a no-closing-cost refinance work?

A lender might offer you a no-closing-cost refinance with lender credits. Lender credits represent money the lender provides upfront to cover closing costs in exchange for charging you a higher interest rate over the life of the loan. Lender credits are also called negative points, and they’re found in Section J on the second page of your Loan Estimate.

If you accept more lender credits, you pay a higher interest rate on the loan. The interest rate you’re offered can depend on your credit, the lender and conditions in the economy.

On the other hand, lenders offering no-closing-cost refinances may instead add the closing costs to your loan balance. This means you’ll have a larger loan to pay back, and you’ll probably pay more in interest than you would’ve otherwise because the interest is applied to a larger balance. Having a larger loan could also result in being charged a higher interest rate.

Keep in mind that if you’re refinancing through a government program, these methods for avoiding upfront closing costs may not be available depending on the program’s rules.

Here are a few examples.

  • A VA IRRRL (also known as a VA streamline refinance) allows either lender credits or closing costs to be added to the loan.
  • A nonstreamlined USDA refinance allows closing costs to be rolled into the loan as long as this doesn’t put the amount of the loan above the home’s appraised value. Closing costs can also be added to the loan balance for streamlined and streamlined assist USDA refinances.
  • An FHA refinance loan allows the one-time mortgage insurance premium payment to be rolled into the loan, but that doesn’t represent all potential closing costs. Lender credits are allowed for FHA streamline refinances.

What are the benefits of a no-closing-cost refinance?

The main benefit of a no-closing-cost refi is that you don’t have to make a lump-sum payment on your closing expenses when you finalize the loan. Refinancing costs vary depending on how much you owe on your mortgage and where your home is located. On average, a mortgage refinance costs about $5,000, according to Freddie Mac, the federally chartered mortgage investor. That’s a significant amount of money.

If you’d otherwise have to save up for a while to pay closing costs, a no-closing-cost loan could allow you to refinance right away, which could help you save money in the long run.

If interest rates are lower now than when you took out your mortgage or if your credit scores have gone up, you might be able to refinance with a lower interest rate and start saving money immediately. If you have an adjustable-rate mortgage and your rate is about to rise, you might be able to avoid paying more in interest if you refinance with a fixed-rate mortgage or an ARM with a lower cap before that adjustment takes effect.

Another potential benefit is that if you don’t have a prepayment penalty and you’re planning to move within five years, refinancing without closing costs may help you skip the upfront payment while you’ll only pay a bit more each month for a few years.

What are the disadvantages of a no-closing-cost refinance?

One downside of a no-closing-cost refinance is that you typically have a higher monthly mortgage payment, either because your interest rate is higher or because you have to repay a larger principal. That can make it harder to fit your mortgage payment into your budget, and it may also mean that you ultimately pay more over the course of the loan. (You’ll have to weigh if any savings from a lower rate or shorter loan term offset that.)

Another disadvantage is that if your lender imposes a prepayment penalty, you’ll have to pay a fee if you refinance or sell your home within the time period set by your lender. If you’re subject to a prepayment penalty, it’s typically in effect for the first three or five years after your refinance.

Should I get a no-cost refinance?

If you’re not sure whether a no-cost refinance is right for you, ask yourself these questions.

  • How long am I planning to stay in my home? If you expect to sell in the next five years, not paying upfront closing costs in exchange for a slightly higher monthly payment than you’d otherwise owe might be worthwhile. But you should find out if your lender will charge a prepayment penalty.
  • Do I want to remodel or update my home in the near future? If you’re deciding between taking out a home equity loan versus getting a no-cost refinance and using the money you would’ve spent on upfront closing costs, a home equity loan may be a more expensive way to finance work on your home.
  • How will the loan principal, interest rate and monthly payment change if I don’t pay closing costs upfront? Remember that a no-closing-cost refinance isn’t actually “free” — you’ll generally have to pay more later to cover the closing costs.
  • How much interest will I pay over the life of the loan? If avoiding upfront closing costs results in a higher total interest bill over time, it may not be worth it.
  • How long would it take me to save up for closing costs? If you can save up enough to pay for closing in a few months, you might prefer to wait rather than accept higher monthly payments in the long term. On the other hand, if there’s a reason you want to refinance immediately (for example, the rate on your adjustable rate mortgage is about to rise), you may decide it makes more sense to go with a no-closing-cost refi now.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.