Wendy Wilson

Refinancing is a great way to save money by reducing your mortgage interest rate. Are you looking to refinance but don’t have the funds to pay the hefty upfront fees? Don’t let a lack of funds keep you from getting a lower interest rate. A no-closing-cost refinance is a great option that doesn’t require you to pay upfront on closing costs. This type of refinance loan is especially beneficial if you plan to move within the next few years.

Here’s what you need to know about this refinance option so that you can determine if it’s a viable solution for you.

The ins and outs of a no closing cost refinance

When refinancing your loan, closing costs can range from 2% to 5% of the principal balance. Traditionally, when refinancing, homeowners are expected to bring these funds to the table at closing.

Closing costs include the following fees:

  • Application
  • Underwriting
  • Title search
  • Appraisal
  • Recording

Unless you have a small principal balance, your closing costs will likely total a couple of thousand dollars. But what if you don’t have these funds? This is where no closing cost refinancing comes into the picture.

Many lenders offer no closing cost mortgages for qualified homeowners. With this type of loan, you don’t have to pay the closing costs upfront. This eliminates the stress of figuring out how to come up with thousands of dollars at once.

Some lenders choose to roll the upfront fees into the total principal balance that you owe. Let’s say you owe $400,000 on a home and your closing costs are at 3%. Instead of refinancing the $400,000, your total loan value will be $412,000.

Other lenders will increase the interest rate on the loan. This allows the lender to recoup some of the closing costs over the life of the loan.

In either scenario, you’ll have a higher monthly payment. Do the math and be sure that your new payment still saves you money. Otherwise, a no closing cost refinance doesn’t offer any benefit.

Be aware that the longer you’re in the home, the more you’ll pay. This means that you may eventually pay more in the long run than the initial upfront closing costs.

» MORE: Find the best mortgage refinance lenders

When does a no closing cost refinance makes the most sense?

There are several scenarios where getting a no closing cost refinance makes sense. For example, if you need to purchase a home but don’t have the funds to pay for upfront fees, this type of refinancing is likely your only option.

Be aware that not all lenders offer no closing cost refinancing. You’ll want to shop around to find a lender that provides this type of loan.

Even on an FMERRs or HIRO loan, which are programs that replace HARP, a no closing costs refinance may be an option. 

Pitfalls of a no closing cost refinance

On the surface, the idea of not having to spend thousands of dollars upfront for a lower interest rate is appealing. However, it’s important to look at the long-term picture. Think about your future housing situation and ensure that this type of refinancing makes the most sense.

If rates are high, you’ll end up paying a lot more in the long run. Take into consideration the rate when considering more debt. This other issue is higher payments and the potential of paying more interest over the life of the loan.

Some lenders add a prepayment penalty to no closing cost loans to discourage borrowers from refinancing again before upfront expenses have been recouped.

Be sure to read the fine print and be aware of any additional interest or fees that you’ll have to pay.

Final thoughts

Before deciding that a no closing cost mortgage makes the most sense, ask your lender to provide an estimate of the closing costs. You’ll also want to compare the difference in interest rates and monthly payments for a no closing cost loan versus paying the upfront fees.

When applying, your lender should give you an official loan estimate, which details the terms and costs for the loan that you choose.

In finalizing your decision, calculate the break-even point. This is the amount of time it will take to recover paying for the closing costs on the loan. Then compare that against the cost of a no closing cost refinance.

Related post