Is A No-Closing-Cost Refinance Right For You?

Buying a home can be expensive. In addition to the purchase price, home buyers have to prepare for a variety of other expenses – like closing costs – when they complete the underwriting process and finalize the loan.

While it’s common to pay a single lump sum at closing, you can also finance your closing costs to reduce how much you pay upfront. The same can be done for a mortgage refinance. Let’s take a look at how a no-closing-cost refinance works and whether it’s the best option for you when you’re looking to refinance your current mortgage loan.

What Is A No-Closing-Cost Loan Refinance?

A no-closing-cost refinance allows you to avoid paying closing costs in a lump sum when closing on your new loan. Instead, it rolls your closing costs into your monthly mortgage payment or exchanges some of the upfront charges for a higher interest rate across the life of the loan.

To be clear, a no-closing-cost refinance does not mean your closing costs are completely forgiven or removed from the transaction. It means they’re dispersed across your loan repayment term. This type of refinancing could give you a larger principal balance and higher monthly payment, depending on how you choose to cover the closing costs.

What Is Typically Rolled Over In A No-Closing-Cost Refinance?

Closing costs are a collection of expenses that come with purchasing or refinancing a home. These costs are separate from the home’s purchase price. Typically, the costs you’ll roll over when you opt for a no-closing-cost refinance include lender fees, third-party fees, various homeowner fees and the cost of any mortgage points you want to purchase.

Lender Fees

Lender fees will vary depending on your lender and the type of loan you have but usually include:

• A loan origination fee (typically .5% – 1% of the loan amount)
• An application fee
• Prepaid interest on your first month’s mortgage payment

Third-Party Fees

Your lender works with other service providers when you get a mortgage, and your closing costs will be used to cover these fees. Some third-party fees include:

• Appraisal fees
• Title insurance premiums
• Credit score report costs

Homeowner Fees

As a homeowner, there are several costs you may be required to pay ahead of time, including property taxes and homeowners insurance. Payments on taxes and insurance are put into an escrow account. If your home is part of a homeowners association (HOA), fees may also be paid to the HOA as part of your closing costs.

Mortgage Points

Your lender might give you the option to pay for mortgage points, also known as discount points. This charge is paid directly to your lender to reduce your mortgage rate and monthly payment. Purchasing mortgage points is commonly referred to as “buying down the rate.”

How Does A No-Closing-Cost Refinance Work?

No-closing-cost refinances may be a good option for borrowers who don’t want to bring the money to cover closing costs and fees to the table at closing. If you’re concerned about paying a lot upfront when you close, you can choose to pay those fees over time. The rolled-in closing costs can be spread across your loan repayment term in a couple of ways.

Your Interest Rate Goes Up

If you don’t pay fees at closing, you likely won’t get the lowest interest rate possible because your lender will increase your refinance rate to cover the amount you owe in closing costs.. Essentially, the extra money from the higher mortgage rate repays your closing cost over the long term.

Depending on your current mortgage rate, this might not be as bad as it may sound. For example, if you purchased your home when interest rates were very high and you refinance to a lower interest rate on your new loan, even the slightly higher rate your lender charges to recoup your closing costs should be lower than your original purchase rate.

Your Loan Principal Increases

With this option, your closing costs are rolled into your principal loan balance. In other words, they’re added to the amount you borrowed from your lender and factored into your monthly payments. While this option doesn’t affect your interest rate, you’ll pay more interest over the life of your loan since the rolled-in closing costs will increase the overall amount borrowed.

Unless you’re purchasing a home with a Federal Housing Administration (FHA) loan, Department of Veterans Affairs (VA) loan or U.S. Department of Agriculture (USDA) loan and building in certain fees, you can only choose to roll your closing costs into your principal with a refinance. Essentially, you would use your home equity to pay for the costs.

It’s important to note that not all lenders will offer both of these options for a no-closing-cost refinance. If you strongly prefer one option over the other, find out what the lender offers before committing to a no-cost refinance.

Who Benefits Most From A No-Closing-Cost Refinance?

If you’re planning to sell your home and move within 5 years or think you’ll refinance soon, it might be wise to consider a no-closing-cost refinance. If you agree to pay a higher interest rate on the loan, you’ll typically pay off the amount you owe in closing costs within 5 years. With a no-closing-cost refinance, you’ll avoid paying the closing fees as a lump sum upfront. You either won’t be in the home long enough to pay significantly more in interest, or you may be able to refinance to a lower interest rate.

A no-closing-cost refinance might also make sense for homeowners who are looking to renovate their homes, but don’t have the cash. For them, agreeing to a higher interest rate to avoid closing fees might be less costly than taking out a home equity loan. Borrowers can use a cash-out refinance and avoid closing costs while getting a new mortgage.

Homeowners with an adjustable-rate mortgage (ARM) can use a no-closing-cost refinance to switch to a fixed-rate mortgage. If your interest rate is set to increase soon, a no-closing-cost refinance could help you lower your interest rate without having to pay closing costs upfront.

Typically, if you plan on living in your home for more than 5 years, the extra interest you pay may eventually exceed the amount you would have paid in upfront closing costs. That means you might end up paying more than you would have if you’d put up the money in full at closing. How much more depends on your specific loan terms.

Understanding Refinance Fees

When you apply for a refinance, your mortgage lender can provide you with a detailed analysis of your closing costs along with the difference in your interest rate depending on whether you pay the costs as an upfront fee or over time. Knowing these numbers lets you see how much more you would pay over the life of your loan with a no-closing-cost refinance option.

For example, let’s say you have $150,000 left to pay on your loan when you refinance. The lender offers you a 3.75% interest rate and requires you to pay $3,500 in upfront closing costs. You have the option to finance the closing costs by paying a higher interest rate of 4.25%. If you take this option, you’ll end up paying around $14,000 more over a 30-year period than you would if you’d paid the closing costs upfront.

Knowing the cost breakdown will help you determine the breakeven point – the point where paying the closing costs upfront makes more sense than paying higher interest. Evaluate refinancing costs alongside your budget to determine the best way to hold on to your house without breaking the bank.

You can use our mortgage refinance calculator to take a look at how different interest rates would affect your monthly payments.

The Bottom Line: A Refinance Without Closing Costs Can Be The Right Choice

Financing closing costs over a longer period or paying them upfront each has its own benefits and drawbacks. Knowing what you’re comfortable paying upfront and what your long-term goals are can help you decide which option is best for you.

Ready to explore your refinancing options? Start your application online and talk to one of our Home Loan Experts to learn more. You can also give us a call at (833) 326-6018.