Is a no closing cost mortgage refinance right for you?

If you’re thinking of refinancing your mortgage, you might have heard of a “no-closing-cost” refinance option. With this option, the fees you would normally pay out-of-pocket at closing may instead be added to the total amount of your loan, or a lender might not charge any fees or closing costs at all.

This might sound appealing, but there are some details you should be aware of before moving ahead with your decision.

Average mortgage refinance closing costs

You can expect to see many similar fees arise during the refinance process that you may have had to pay to get your original mortgage. This is because refinancing simply replaces your existing mortgage with a new interest rate and a new term length, so the refinance process includes many of the same steps.

The exact cost of refinancing will depend on a variety of factors such as your lender, the type of loan, and the specific terms of your agreement. However, some common fees you might expect to pay include:

• Application fee: This fee covers the cost of processing your loan application.
• Appraisal fee: A professional appraiser may be hired to determine the value of your home, which helps lenders ensure that they aren’t lending more than the home is currently worth.
• Title insurance and search fee: This fee helps protect the lender (and potentially the borrower) in case any issues arise with the title during the refinance process.
• Discount points: These are fees that can be paid upfront to lower your interest rate.

On average, refinance closing costs may range from 2-5% of your total loan amount. Depending on the balance on your mortgage that you want to refinance, this can amount to thousands of dollars. Budgeting for these fees is an important part of deciding whether you can afford to refinance and may make a mortgage refinance option with a lower interest rate less attractive when you calculate the overall cost of the loan.

What is a no closing cost refinance?

As mentioned earlier, a no closing cost refinance does not require any out-of-pocket payment of closing costs. There are typically a couple ways that this may happen:

• Some lenders may charge closing costs but provide you with the option to include those costs into the principal amount of your loan. In this case, you would then pay interest on that larger amount. For example, if your new mortgage is $200,000 and your closing costs are $4,000, your total loan would be $204,000, and you would accrue interest on that amount while you pay back the loan.
• Other lenders may waive the closing costs in exchange for you committing to a higher interest rate than their competitors who pass the fees on to you.
• You may also find lenders that offer a combination of these options.

It’s important to do your research and determine if your lender is charging you closing costs, and whether they require cash due at closing or finance the fees as part of the loan, so you can accurately compare your options.

Pros and cons of no closing cost refinancing

On the surface, a no closing cost refinance might sound like a great option. Who wouldn’t want to save money upfront on fees? However, there are some trade-offs to consider before deciding if this is the right option for you.

Pros

• You won’t pay any upfront fees.
• If you don’t have the cash on hand to pay for closing costs, a no closing cost refinance may be a viable option for taking advantage of interest rates that are lower than you have on your current mortgage or for extending or shortening your loan term.
• If you’re planning on moving or refinancing again relatively soon, a no closing cost may be a way to save money.

Cons

• A no closing cost refinance typically results in a higher monthly payment, either because the fees are added to the overall loan amount or because a lender may charge you a higher interest rate when they waive closing costs.
• You may end up paying more interest over the life of the loan if closing costs are included in the principal because of the higher balance.
• If you plan on staying in your home long-term, it’s possible that the upfront savings won’t outweigh added interest costs.

How to decide if a no closing cost refinance is right for you

So, how do you know if a no closing cost refinance is a good option for you? Consider the following:

• Your financial situation: If you’re currently experiencing financial strain and can’t afford to pay closing costs upfront, a refinance with no closing costs may make sense.
• Your homeownership plans: If you plan on selling your home or refinancing it again within a few years, you may want to compare the monthly payments that will come with different refinancing options to decide what may work best for your current budget and future plans. 
• Your long-term financial goals: If you plan on staying in your home for a long time, calculate the total cost of the loan with and without fees rolled into it. If the added interest costs aren’t worth the upfront savings, it may not be the best option for you. Or, if you have an offer for a higher interest rate from a lender that waives application, origination, appraisal fees and closing costs, you may find that this works better for you than budgeting to pay thousands of dollars in upfront closing costs.

How to find no closing cost refinance lenders