What is a no-closing-cost refinance?

Quick insights

• A no-closing-cost refinance is mortgage refinancing that helps cover closing costs.
• A no-closing-cost refinance simply disperses the fees elsewhere in your loan. You can either increase your interest rate or increase your principal.
• You can negotiate aspects of a no-closing-cost refinance to save money over the life of your loan. For instance, you may be able to negotiate waived closing costs in exchange for a higher interest rate.

At the end of most real estate transactions, you’ll typically have to pay closing fees to finalize the transaction. Fortunately, there’s a way around this with a no-closing-cost refinance mortgage.ec-refinance-hl000061

First, what are closing costs?

Closing fees, or closing costs, include the upfront costs, in addition to your down payment, that come with buying or refinancing a home. They are paid once you receive your title or the transaction is finalized. Closing costs cover things like title searches, taxes, credit report changes, home appraisal fees and other loan origination fees and items. Whether you’re taking out your first mortgage or refinancing one that already exists, closing costs are part of the process.

What are typical closing costs for a buyer?

• Credit report fee: As part of the loan approval process, your lender will run a credit check, which incurs a fee.
• Application fee: You may have to pay a loan application fee, depending on your lender’s requirements.
• Loan origination fee: This expense reflects the costs associated with the administrative work required between loan approval and loan disbursement at closing.
• Attorney fees: Your attorney's fees cover the legal assistance you received throughout the homebuying process. Sometimes, banks hire their own attorney, which homebuyers may have to factor into closing costs. Your lender can advise whether attorney fees will be included.
• Appraisal fee: Your lender will likely require an appraisal to assess the fair market value (FMV) of the home. This service fee will be wrapped up in your closing costs.
• Property taxes: At closing, the buyer reimburses the seller for property taxes paid between the closing date and when the tax period ends.
• Title search and insurance fees: These fees cover conducting a title search to confirm there are no ownership claims over the home and acquiring home insurance.
• PMI premium: Private mortgage insurance (PMI) is a policy that safeguards the lender in case you default on the loan. It’s typically required if your down payment is less than 20%.
• Recording fees: This charge covers the costs of recording the new deed to your home, typically at the county clerk's office.

What is a no closing cost refinance?

A no-closing-cost refinance is mortgage refinancing that helps cover closing costs. So, if you’re looking to refinance but don’t have the cash to cover additional closing fees upfront, you can shop around for a loan that can cover your closing fees at signing. You’ll still owe closing fees, but you have the benefit of paying them over time. For a no-closing-cost refinance to make sense for a lender, they need to recoup the money they would have received upfront during closing.

How does no closing cost refinance work?

A no-closing-cost refinance simply disperses the fees elsewhere in your loan. You can either increase your interest rate or increase your principal. If you agree to a higher interest rate, the lender covers your loan closing costs. This can be a great option if you don't plan on staying in this home long-term. But if you are, you may end up paying more over time than if you covered the closing costs upfront.

However, choosing to increase your principal may be a better fit if you want to stay in your home long-term. Increasing your principal will result in your closing costs getting rolled into your loan balance, which will raise the amount of your monthly payments. This strategy should keep your interest rate lower and potentially save you a significant amount of money in the long run. 

Your lender may be flexible with which option you prefer, or they may require you to increase your interest rate or principal as part of their terms. Make sure you do the math and consider how long you’ll be in the house to determine which is the best financial path. Lenders may be able to help you calculate how each choice would impact your monthly payments, and how each option would affect the total cost of the loan over its lifetime.

Do you have to pay closing costs every time you refinance?

When you refinance your mortgage, you have to pay closing costs, since you’re acquiring a new mortgage that replaces your former one. But with a no-closing-cost refinance, you don’t have to pay closing costs upfront. Instead, those fees—like the appraisal fee—will roll into your loan to add to the principal balance.no-closing-cost-refinance

Can you negotiate closing costs?

Yes, you can negotiate aspects of a no-closing-cost refinance to save money over the life of your loan. For instance, you may be able to negotiate waived closing costs in exchange for a higher interest rate. It can be helpful to shop around and get quotes from multiple lenders to compare loan estimates and associated fees. You can then potentially leverage this information to lower fees or waive them altogether, especially if you have strong credit. For instance, you may be able to negotiate loan application or loan origination fees.no-closing-cost-refinance reducing-closing-cost

No-closing-cost refinance pros and cons

Pros

• Less money required upfront
• Potentially cost less than other loan or refinancing options
• Frees up cash for other projects, like home renovations

Cons

• Potentially higher interest rates
• Higher monthly payments
• May end up paying more over time

In summary

Whether you want to lower your monthly payments or reduce the overall cost of your loan, refinancing a mortgage with no closing costs can help you meet your financial goals. Navigating a no-closing-cost refinance may be worth exploring, depending on how long you’re planning to stay in the home and your financial situation. Carefully consider your options with your lender to determine which options make the most sense for your finances while minimizing long-term costs. You can also compare estimates between lenders and/or negotiate terms and fees to potentially save even more.

Consult with a home lending advisor to see what’s right for you.