Here Are the Ins and Outs of a No Closing Cost Refinance

Mortgage and refinance loan rates are extremely low right now, which may have you wondering, “Can I refinance my mortgage with no closing cost?” The good news is a no closing cost refinance is a fairly common type of refinance — but just because the name says no closing costs doesn’t mean there aren’t extra costs you’ll need to pay.

Before you opt for this type of refinancing, you need to know what those costs are, how a no closing cost mortgage can benefit you and what the downsides to this type of mortgage refinancing can be. Otherwise, you could end up in over your head on your loan.

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In this article

    What is a no closing cost refinance?

    A no closing cost refinance is a type of mortgage refinance loan which comes with no closing costs — not ones that need to be paid upfront, anyway. But just because you aren’t paying any fees at closing doesn’t mean your lender is giving you a free ride. 

    The thing about no closing cost refinances is that they still cost you money. Rather than paying the fees for closing, this type of loan rolls the fees into the principal of the new loan or into a higher interest rate instead. 

    The most common way that no closing cost refis are handled is to add the total amount of closing costs to the principal of the new loan. You’re still technically paying the closing costs — you’re just doing so over a longer period of time with interest. If your closing costs are rolled into your loan principal, your monthly payments will be slightly higher, and you will pay interest on that amount — just as you do with the principal.

    Some lenders might choose to increase your interest rate as a tradeoff for no closing costs. A higher interest rate means you’re paying more each month for borrowing the money, which means this type of refi will also raise your monthly payments. The principal amount of the loan, however, will remain the same.

    [ Read: The 10 Best Cities for Refinancing a Mortgage ]

    Typical closing costs

    When you closed on your initial mortgage, there were a number of fees that were paid as part of the closing costs. Typical refinancing fees will run from 2% to 6% and include the loan origination fee, which is the cost for the lender to prepare the loan and the loan application fee. The loan origination fee can range from 1% to 1.5% of your loan on average, while the loan application fee can range from $75 to $300. 

    You might remember paying an appraisal fee and inspection fees when you got your mortgage, too. In most cases, you’ll pay those with a refinanced mortgage as well. The appraisal fees typically range from $300 to $700, while the inspection fees might cost anywhere from $175 to $350 or more. 

    Other fees you can expect to encounter are the closing fee of $500 to $1,000 and a title search and title insurance that typically runs from $700 to $900. If the amount refinanced is more than 80% of the property value, you will also be required to pay for extra mortgage insurance — which can cost between 0.5% to 1.5% of the principal amount and is included in the monthly payments.

    Drawbacks of a no closing cost refinance

    • Your monthly mortgage payment will be higher than it would if you paid the closing costs upfront. This is true whether you get a no closing cost refinance that adds the costs to the principal or if your interest rate is increased to offset the lack of closing costs.
    • A new appraisal may need to be done on your home as part of the refinancing process. While this might not cost much, it can also cause your property taxes to increase, potentially by quite a bit if it’s been some time since the last appraisal. It can also be detrimental to you if your home appraises for less than what you currently owe on it.
    • You will pay more over the life of the loan for this type of refi because either the principal or the interest rate has been increased.
    • If you want to keep your interest rate as low as possible, you may need to pay for mortgage points. While these can also be added to the no cost refinance, it will also increase the principal amount of the loan and your mortgage payment.
    • Applying to refinance will result in a hard pull of your credit, which will bring your score down temporarily. This is only a problem if there are other large purchases, such as a car, that you plan to make in the coming months.

    [ More: When to Refinance Your Mortgage ]

    When you’ll benefit from a no closing cost refinance

    If you’re thinking of a no closing cost refinance, the first thing you’ll want to do is consider your current financial situation, as well as your long term plans and obligations.

    If you have the money for closing costs, it always makes sense to pay them upfront. If you can’t come up with the cash but interest rates are much lower now than they were when you took out your loan, you may come out on top by refinancing.

    a no closing cost refinance might be the only viable option for those who really don’t have the savings to cover the closing costs upfront.

    You’ll also see the best benefits if you plan to sell your home within five years of refinancing. It takes about five years to break even from the costs associated with refinancing, so if you’re taking those onto your principal and selling soon, you’ll come out on top.If you still aren’t sure if a no closing cost refinance is right for you, take a few minutes to run the numbers through a mortgage refinance calculator. Once you crunch the numbers you’ll be able to see the difference in what total costs are for a no closing cost refinance versus a standard refinance.

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    Steven Walters

    Contributing Writer

    An avid traveller and hiker, Steve has been writing in the personal finance, investing, and blockchain spaces for nearly a decade. His writing has been featured on Financial Samurai, Free Money Finance, Coin Bureau, and a number of other personal finance and investing sites.