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How Does a No-Closing-Cost Refinance Work?

Published on: October 13, 2021

A no-closing-cost refinance eliminates out-of-pocket closing costs when refinancing. It can be an effective way to refinance your home without paying thousands of dollars in cash for closing costs. But a no-closing-cost refinance isn’t free. You’ll still pay closing costs; you’ll just pay them differently than you would in a traditional refinance.

Learn more about no-closing-cost refinances, including how they work, how much they cost, and whether a no-closing-cost refi is right for you.

How does a no-closing-cost refinance work?

The exact terms of a no-closing-cost refinance vary by lender. However, a refinance with no closing costs typically works in one of two ways: Either you’ll pay a higher interest rate on your loan, or you’ll have a higher loan amount. 

  • No-closing-cost refinance with a higher interest rate: The lender covers the closing costs and, in exchange, charges you a higher interest rate on the mortgage. 
  • No-closing-cost refinance with a higher loan amount: The lender adds the closing costs to the loan amount, so you’ll finance the closing costs along with the home purchase. 

In some instances, a lender that offers no-closing-cost mortgages may charge you a higher interest rate and roll the closing costs into the loan. Before proceeding with a no-closing-cost refi, ask your lender how their no-closing-cost refinance works. If you are refinancing from a 30-year mortgage and looking for a 15-year refinance with no closing costs, the higher rate may still be lower than the rate on your current 30-year loan. However, the monthly payment will typically be higher.  

Regardless of the exact terms of a no-closing-cost refinance, you’ll have a higher monthly payment and will pay more in interest over the life of the loan compared to paying closing costs upfront. Even considering the higher costs, no-cost refinances appeal to some borrowers because they reduce or eliminate out-of-pocket expenses. This can allow homeowners to refinance quickly without having to save up thousands of dollars.

How much are closing costs on a refinance?

Typical closing costs for refinance mortgages can range from 3% to 6% of the loan amount. However, closing costs depend on many factors, including the loan type, mortgage amount, and the county and state in which you live.  

In some cases, borrowers may pay significantly less than the average refinance closing costs. For example, FHA and VA borrowers may qualify for streamline refinances, which often have some of the lowest refi closing costs compared to other loan types. Your lender will provide you with a loan estimate detailing the closing costs of your refinance loan. 

Here’s a look at some of the typical expenses that make up closing costs for refinance loans. These fees are in addition to any discount points (prepaid interest) you may pay.  

Typical closing costs for refinance loans 
Government recording costs. These are fees paid to your state and local government to record all documents related to your refinance loan.  
Appraisal fee. Your lender will order an appraisal to determine the value of your home. 
Application or credit report fee. Your lender may charge a fee to process your loan application and check your credit. 
Origination fee. Lenders typically charge a fee to evaluate and underwrite your mortgage. 
Title search and title insurance. Lenders will require a title search and title insurance to ensure you are the rightful owner of the property. You may save money by using the same company as you did when you purchased the home. 
Tax service fees. Lenders use a service to ensure there are no tax liens on the property. 
Survey fees. Your lender may require confirmation of the property location and structures on the land. You might not have to pay for this if a survey was done recently.  
Attorney fees. This fee goes to your lawyer or settlement officer. 
Mortgage insurance or funding fee. Depending on the loan type, you may have to pay mortgage insurance or a funding fee upfront. In some cases, you may be able to roll these costs into the loan. 

Example of a no-closing-cost refinance

Let’s look at how a refinance mortgage with no closing costs may work. In the following example, a borrower is refinancing to a 30-year fixed-rate loan, and the closing costs total $15,000. We’ll compare paying closing costs upfront to the two no-closing-cost refinance options: financing the closing costs or having a higher interest rate. 

Upfront closing costs vs. no-closing-cost refinance 
  Traditional refinance with upfront closing costs  No-closing-cost refinance with a higher loan amount  No-closing-cost refinance with a higher interest rate 
Loan amount  $300,000   $315,000   $300,000  
Out-of-pocket closing costs  $15,000  $0  $0 
Interest rate*   3%  3%  3.5% 
Monthly payment (principal and interest)  $1265  $1328  $1347 
Total interest paid  $155,333  $163,100  $184,970 
Total loan cost  $455,333  $478,100  $484,970 
Loan cost plus closing costs  $470,333  $478,100  $484,970 

*Interest rates are for illustrative purposes only. To get current no-cost-refinance rates and information on other products, consult a Finance of America Mortgage Advisor.

As you can see in the above example, both no-closing-cost refinance options have a higher monthly payment than refinancing and paying closing costs upfront. And they both end up costing the borrower more over the life of the loan.

A refinance calculator can help you crunch the numbers and compare paying closing costs upfront to a ​mortgage refinance with no closing costs.

Pros and cons of a no-cost refinance

No-closing-cost refinances eliminate having to pay cash at closing; however, they can cost significantly more in the long run. Before committing to a no-closing-cost refi, consider the pros and cons carefully.

Pros  Cons 
A no-closing-cost refinance reduces out-of-pocket expenses.  You’ll have a higher mortgage payment with a no-closing-cost refinance
A no-closing-cost refinance can be cheaper than other loans such as a home equity loan or home equity line of credit (HELOC).  You’ll pay more interest over the life of the loan either from a higher rate or by paying interest on the closing costs. 
A no-closing-cost refinance frees up cash for savings or other expenses.  You may have a penalty if you refinance early into the loan. 

When considering a no-closing-cost refinance, keep in mind that there is no such thing as a mortgage refinance with no closing costs. A no-cost mortgage refinance simply changes how and when you pay for the closing costs. That said, a no-cost refinance may benefit some borrowers. 

If you plan to remain in your home for just a few years, a no-closing-cost refinance could work in your favor. Because you won’t be covering the closing costs out-of-pocket and will be selling the home before paying several years of the higher payment and additional interest, you might save money. An excellent way to see where you stand is to look at your break-even point for refinancing. If you plan to sell the home well before your break-even point, a no-cost refinance could cost you less than paying closing costs upfront.  

On the other hand, if you’ll be in your home for an extended period, for example if you’re in your “forever home,” a no-closing-cost refinance will likely be a lot more expensive than paying the closing costs upfront. Remember, you’ll be paying a higher payment and additional interest for the life of the loan. If you choose a no-cost refinance and keep the loan for 15 or 30 years, you’ll be paying additional interest the entire time.

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