A mortgage refinance gives homeowners the opportunity to rewrite the terms of their existing mortgage loan to reduce their monthly payment, lower the interest rate or borrow against their home’s equity. But just like the original mortgage, a mortgage refinance comes with closing costs when you complete the underwriting process and finalize the loan.
Typically, homeowners who are refinancing their mortgage will pay a single lump sum at closing. But some lenders will allow you to finance your closing costs so you pay nothing (or a minimal amount) up front for your mortgage refinance.
Here’s what you need to know about how a no-closing-cost refinance works so you can decide if it’s the right option for your mortgage refinance.
Key Takeaways
- You don’t pay closing costs as a lump sum with a no-closing-cost refinance, but that doesn’t mean the costs are forgiven.
- Lenders who offer zero-closing-cost refinance loans will either roll the closing costs into the principal balance of the loan or offer the borrower a higher interest rate in exchange for waiving the costs.
- It may make sense for homeowners who plan to move before reaching their break-even point.
What Is A No-Closing-Cost Refinance?
When you refinance your mortgage, you take out a new loan that pays off your existing mortgage. Like the initial purchase of your home, a mortgage refinance requires you to go through the process of closing on the loan, which includes paying closing costs.
Typically, closing costs equal 2% – 6% of the loan amount in a mortgage refinance. This means a homeowner refinancing $200,000 could expect closing costs ranging from $4,000 – $12,000. In most cases, the homeowner would pay the mortgage refinance closing costs as a lump sum at closing.
But not all borrowers have the cash to close, which is why lenders offer a no-closing-cost refinance as an option. You can roll your closing costs into your loan balance, which increases your monthly payment. That means you are adding the balance of the closing costs to your loan principal, which will increase your monthly mortgage payment.
Alternatively, your lender may allow you to waive many of the upfront closing costs for a slightly higher interest rate for the life of the loan. This means you will pay more in interest over time.
To be clear, a no-closing-cost refinance doesn’t mean all of your closing costs are forgiven or removed from the transaction. It means instead of paying closing costs in a lump sum at closing, you will pay them in one form or another across your loan repayment term. With a no-closing-cost refinance, you will either have a larger principal balance or a higher interest rate than you would have had with a traditional mortgage refinance.
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What Is Rolled Over When You Refinance Without Closing Costs?
To understand what costs you’ll roll over when you opt for a no-closing-cost refinance, you need to know exactly what closing costs are and why they’re part of the mortgage lending process.
Closing costs, which typically include lender fees, third-party fees, homeowner fees and the cost of any mortgage points you want to purchase, are separate from the home’s purchase price or the mortgage refinance loan amount. Here’s a closer look at each of these costs:
Lender Fees
Lender fees will vary depending on your lender and the type of loan you have, but they 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, you may be required to pay several costs – including property taxes and homeowners insurance – ahead of time. Payments on property taxes and homeowners insurance usually go 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.”
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How Does A Zero-Closing-Cost Refinance Work?
There are two main ways to get a no-closing-cost refinance: roll over the unpaid closing costs into the principal balance of the mortgage refinance loan or accept a higher interest rate in exchange for waiving the closing costs.
In either case, you technically have a zero-closing-cost refinance as of your closing day, but you will still pay those closing costs over time. In fact, you will pay more for the closing costs over time than you would have if you had made the lump-sum payment at closing.
Here’s how each one of these options works.
Roll Over Your Closing Costs And Increase Your Principal Loan Balance
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 payment. While this option doesn’t affect your interest rate, you’ll pay more in interest over the life of your loan since the rolled-in closing costs will increase the overall amount borrowed.
Waive Closing Costs In Exchange For An Interest Rate Increase
If you don’t pay fees at closing, you likely won’t get the lowest possible interest rate. That’s because your lender will bump up your refinance rate to cover the amount you owe in closing costs. Essentially, the extra money from the higher mortgage rate helps repay your closing costs 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 higher rate your lender charges to recoup your closing costs could be much lower than your original purchase rate.
It’s important to note that not all lenders offer both of these options for a no-closing-cost refinance. Some lenders may not offer a no-closing-cost refinance at all. Consequently, it’s always best to find out what the lender offers before assuming you can take a no-closing-cost refinance.
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When Should You Refinance Without Closing Costs?
There are several scenarios when a no-closing-cost refinance might be the best type of mortgage refinance to pursue.
Homeowners who are planning to sell their home and move within 5 years of the refinance are often ideal candidates for no-closing-cost refinance loans. That’s because anyone moving within 5 years of the refinancing won’t remain in the home long enough to pay more in interest than they saved up front.
Typically, if you plan on living in your home for more than 5 years, the extra interest you pay will eventually exceed the amount you would have paid in upfront closing costs. That means you’ll pay more over time than you would have at closing. How much more depends on your specific loan terms.
However, a no-closing-cost refinance might also make sense for homeowners who are looking to renovate their home but don’t have the cash. For them, agreeing to a higher interest rate to avoid closing fees might seem less costly than taking out a home equity loan. Borrowers can use a cash-out refinance and finance their closing costs while getting a new mortgage.
Finally, 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 rate without having to pay closing costs up front. In some cases, refinancing the ARM before an adjustment may outweigh the added cost of a no-closing-cost structure.
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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 monthly payment or 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.
Example Of Refinance Fees: Rolling Closing Costs Into The Loan
Let’s say you are refinancing the remaining $200,000 on your original mortgage loan and have qualified for an interest rate of 6% with a 15-year repayment term. Your closing costs come to $8,000. Take a look at how your monthly payment and total interest paid over the life of the loan compare if you pay the closing costs up front in a lump sum versus rolling them over into your principal balance:
| Traditional Mortgage Refinance | No-Closing-Cost Refinance With Costs Rolled Over | |
|---|---|---|
| Cost Paid At Closing | $8,000 | $0 |
| Principal Loan Balance | $200,000 | $208,000 (with $8,000 closing costs rolled into the principal loan balance) |
| Monthly Mortgage Payment | $1,688 | $1,755 |
| Total Lifetime Interest | $103,788 | $107,940 |
| Total Cost Of Loan | $311,788 (Including lump-sum closing costs) | $315,940 |
Example Of Refinance Fees: Taking A Higher Interest Rate
Let’s say you’re refinancing the remaining $200,000 on your mortgage with a 6% interest rate and a 15-year repayment term, but you don’t want to roll over the $8,000 in closing costs (which equals 4% of the principal balance) into your loan. Instead, your lender is willing to waive the closing costs if you accept an interest rate increase to 6.6% rather than 6%.
Here’s how that would affect your monthly payment and total interest paid.
| Traditional Mortgage Refinance | No-Closing-Cost Refinance With Higher Interest Rate | |
|---|---|---|
| Cost Paid At Closing | $8,000 | $0 |
| Principal Loan Balance | $200,000 | $200,000 |
| Interest Rate | 6.0% | 6.6% |
| Monthly Mortgage Payment | $1,688 | $1,753 |
| Total Lifetime Interest | $103,788 | $115,581 |
| Total Cost Of Loan | $311,788 (Including lump sum closing costs) | $315,581 |
Knowing the cost breakdown will help you determine the break-even point – the point where paying the closing costs up front makes more sense than paying higher interest. Evaluate refinancing costs alongside your budget to determine the best way to hold onto your house without breaking the bank.
You can use our mortgage refinance calculator to look at how different interest rates would affect your monthly payments.
FAQ
Check out the answers to some frequently asked questions about refinancing without closing costs.
The Bottom Line: A Refinance Without Closing Costs Can Be The Right Choice
Financing closing costs over a longer period and paying them up front each have benefits and drawbacks. Knowing your long-term plans and finances can help you determine which option is best for your situation.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
