A Guide To The No-Closing-Cost Refinance

Many homeowners underestimate exactly how much they need to pay in closing costs during a mortgage refinance. Are closing costs stopping you from getting a refinance? If so, a no-closing-cost refinance (refi for short) might be right for you.

This article will take a look at the true cost of a no-closing-cost refi, explain closing costs and fees, and then discuss why you'd want to choose a no-closing-cost refinance for your home.

What Is A No-Closing-Cost Refinance?

A no-closing-cost refinance is a refinancing option where you don’t have to pay closing costs when you get a new loan. But just because there are no upfront costs doesn’t mean that your mortgage lender foots the bill for free. No-closing-cost refinances don’t eliminate a borrower’s expenses – they only move them into your principal or exchange them for a higher interest rate. Even so, this still means that it is possible to refinance without closing costs paid out of pocket.

How Do No-Closing-Cost Refinances Work?

The simplest no-closing-cost mortgage refinance takes the amount that you would have paid at closing and rolls it into your new mortgage. In other words, your lender adds the balance of your refinance closing costs to your principal, the unpaid balance of your loan. This increases your monthly payments but doesn’t affect your interest rate.

Your lender may also allow you to take a higher interest rate in exchange for waiving your closing costs. Your mortgage interest rate is the percentage of the principal that you pay as the cost for borrowing money. Refinance interest rates depend on many different factors. A higher interest rate doesn’t change your principal amount, but you’ll pay more each month in interest.

Average Closing Costs When Refinancing A Mortgage

Just like when you first bought your home, there are various lender costs to refinance a mortgage you’ll have to pay. In most cases, these closing costs and fees can end up being 3% – 6% of your loan amount. Some of the closing costs you may see when you refinance include:

Loan Origination Fee

You’ll pay an origination fee to your lender to prepare your loan. The average origination fee is 0.5% – 1% of the loan amount and covers the application fee, underwriting and other administrative costs. This is listed in the same origination charges section of your Loan Estimate as discount points.

Appraisal Fee

During a home appraisal, a professional comes to your property to assess its value. When you refinance, you’ll need to get an appraisal or other form of home valuation to ensure your property value hasn’t drastically changed since you bought the home. Lenders will use the appraisal to calculate your loan-to-value (LTV) ratio to help them determine the financial risk of your refinance.

Most appraisers charge $600 – $2,000 for their services. The cost can be higher depending on square footage, the number of units and the distance the appraiser has to travel, among other factors.

Title Fee

When you buy real estate, you receive a document called a deed. A deed shows that the seller transferred legal ownership, or the title, of the home to you. Title insurance protects you from errors in the ownership records of your home or property. Because the refinance is a new loan, you’ll need to pay for the title search and buy a new lender’s title insurance policy.

Luckily, most title insurance companies offer significant discounts for returning customers who already bought a policy when they first bought the home.

VA Funding Fee

If you’re refinancing a VA loan, you’ll need to pay a percentage of your new loan back to the Department of Veterans Affairs (VA). The amount you pay for the VA funding fee depends on the type of refinance being done, the amount of equity you’ll have after the refinance, how much of a down payment you make and whether it’s your first time using a VA loan.

If you’re refinancing from one VA loan to another – a VA Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline refinance – the funding fee is just 0.5% of the loan amount.

Some borrowers, including those receiving VA disability, are exempt from paying the VA funding fee. Additionally, surviving spouses receiving Dependency Indemnity Compensation (DIC) and Purple Heart recipients who are on active duty are exempt.

Mortgage Insurance

Federal Housing Administration (FHA) loans have an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount if you’re refinancing from another type of loan to an FHA loan or if you’re doing an FHA Streamline (from one FHA loan to another). In either case, these can be built into the loan balance.

Conventional loans have the option of a single-pay mortgage insurance. Typically, private mortgage insurance (PMI) is paid every month until you have at least 20% equity. Some borrowers opt for a higher interest rate to get lender-paid mortgage insurance (LPMI). However, with single-pay mortgage insurance, you can choose to pay off some or all of the mortgage insurance policy at closing in order to get a lower rate for the life of the loan

Credit Report Fee

Lenders need to ensure that your credit score hasn’t gone down since you initially bought your home. They’ll also check for financial issues like unpaid student loans or credit card debts. Some lenders pass the fee of checking your credit score back onto you during closing. Credit report fees typically range from $25 to $50 depending on the lender and your state of residence.

Discount Points

Discount points are optional prepaid interest that you pay your lender in exchange for a lower interest rate. Each point costs 1% of your total loan amount, and you can buy multiple points. For example, one point on a $100,000 refinance would cost $1,000. You may also see these referred to as mortgage points.

Whether it makes sense to purchase discount points depends on the amount you save on your monthly mortgage payment by buying them and how long you plan to stay in the house.

Let’s say you’re considering whether to purchase 2 points on a $300,000 loan to save $75 per month. The points would cost you $6,000, and the key is to calculate the breakeven point. In this case, that’s 80 months ($6,000/$75 equals 80). If you plan to stay in the home for at least 6 years and 8 months, then purchasing the points to lower your refinance rate likely makes sense. If you don’t plan to stay that long, either don’t buy the points or buy a smaller number of them.

Other Costs Associated With The No-Closing-Cost Refinance

You can choose between two different options with a no-closing-cost refinance: either an increased interest percentage or a higher loan balance. Not every lender offers both types of no-closing-cost refinances, so make sure your lender can offer you the option you want.

Increased Mortgage Rates

If your lender offers you a no-closing-cost refinance without adding funds to your principal, you’ll need to accept a higher interest rate. A higher interest rate doesn’t change your principal loan amount, but even a small change in your interest rate can mean you’ll pay much more interest over time.

Example: Refinancing With An Increased Mortgage Rate

Say you refinance to take out a $150,000 mortgage loan at 6.5% interest over a 15-year term. You’d end up paying a grand total of $85,199 in interest over the course of your refinance with this interest rate.

Closing costs are usually 3% – 6% of your loan amount. Assuming closing costs totaling $6,000 (4%), the amount you’ll pay for interest plus closing costs will be $91,199.

Now, your lender offers to waive your closing costs if you agree to take the same loan but with an interest rate of 7.1%. In this instance, the total amount you’d end up paying in interest by the time you pay off your loan is $94,196. This means that you’d pay nearly $3,000 more for your loan.

As the interest rate increases, the total amount that you end up paying increases. Crunch the numbers before you agree to take a loan with a higher interest rate.

Higher Loan Balance

When you choose to roll in your closing costs, your total loan balance increases. For example, let’s say that you’re refinancing a $150,000 loan with $6,000 in closing costs. With closing costs rolled in, your new balance is $156,000.

Example: Refinancing With A Higher Loan Balance

Let’s compare the difference between a $150,000 refinance and a $156,000 refinance at a 6.5% interest rate. Let’s also assume that the loan’s term is 15 years. For the $150,000 refinance, your monthly principal and interest payment would be $1,307. With a $156,000 refinance, your monthly payment would be $1,359. That’s a difference of about $52 a month.

Because there’s a higher balance, you’ll also pay $3,408 more in interest over the life of the loan than you would on the $150,000 loan.

Before you roll in your closing costs, make sure you can cover the higher monthly payment.

FAQs For No-Closing-Cost Refinancing

Let’s dig into some frequently asked questions about refinance without closing costs.

What are the benefits of a no-cost refinance?

A no-closing-cost refinance can allow you to keep your refinance plans on track. If you’re planning to refinance and you need money to cover a sudden bill, a no-closing-cost refinance can actually save you money.

Interest rates on mortgage refinances are usually lower than home equity loans, which means that even if you take a slightly higher rate, you may end up paying less compared to another type of loan.

When does a home refinance with no closing costs make sense?

No-closing-cost refinances work best if you plan to stay in your home for less than 5 years. This allows you to avoid paying closing costs as a lump sum, and you’ll sell the home before you pay thousands more in interest over the life of the loan.

The less time you plan to live in your home, the more it typically makes sense to choose a no-closing-cost refinance.

When would a refinance without closing costs not work?

If your current home is your “forever” home, you’ll usually end up paying much more over time with a no-closing-cost refinance than you would by paying your closing costs upfront.

The Bottom Line

Choosing a no-closing-cost refinance may make sense if you don’t plan on staying in your home for very long. But if you plan on living in your home for a long time, you may end up paying thousands more in interest by taking a no-closing-cost loan. Whether a no-closing-cost refinance will work for you depends on your personal finances and current housing situation.

If you feel ready to refinance, no-closing-cost or otherwise, get started with Rocket Mortgage® and apply online today, or give us a call at (833) 326-6018.