What is a no-closing-cost refinance?

A no-closing-cost refinance allows borrowers to refinance a mortgage without paying closing costs at the time of closing.

A no-closing-cost refinance can allow you to take advantage of lower mortgage rates without touching your savings. In some cases, you can even avoid adding to your loan balance. If you opt for a cash-out refinance, it might see you walk away with a fat check.

But there are drawbacks to a no-closing-cost mortgage refinance. Below, we break down when a no-closing-cost option might be right — and when it might not make sense.

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How does a no-closing-cost loan work?

You will have to pay your closing costs eventually. Typically, you’ll pay them in one of two ways:

1. Increasing the mortgage rate you pay. This way, the lender recovers the closing costs from your higher monthly payments.

2. Adds the closing costs to your opening mortgage balance. This means you’ll pay the closing costs down over the loan term.

Pros of a no-closing-cost refinance

If money’s short when you come to refinance, it’s often much better to go ahead with the refinance than to wait until you have sufficient savings.

Even if mortgage rates don’t rise while you’re saving up, you’ll still be paying too high a rate and too big a monthly mortgage payment — and maybe even private mortgage insurance (PMI) — while you’re doing so.

Cons of a no-closing-cost refinance

It’s highly likely you’ll end up paying more if you opt for a no-closing-cost refinance than if you pay those costs out-of-pocket. If you can spare the cash, it’s often better to avoid a no-closing-cost refi.

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How much are closing costs?

According to ClosingCorp (PDF), a company that closely monitors closing costs, “…in 2019 national average closing costs for a single-family property were $5,749 including taxes, and $3,339 excluding taxes.”

But expect very wide variations, depending on the real estate market where you live. CloseCorp estimates closing costs for 2019 were on average 0.86% of the loan value in Colorado and Wyoming but 4.88% in Pennsylvania. And some cities have much higher costs than the averages for their states.

But all those figures are just rough guides and you need to check what yours will be when you compare quotes from multiple mortgage lenders. You’ll find them listed on page 2 of your quotes (more formally known as loan estimates).

What is included in closing costs?

Here’s are the main items you’ll usually find listed, including application fees and lender fees:

• Loan origination fee. Typically 0.5% to 1.0% of the home loan amount. This is the fee your lender charges for all its administrative costs and overhead.
• Appraisal fee. Generally $300 to $600, but this can run into the thousands for big and expensive homes. A lender must know the market value of your home before finalizing a refinance. Appraisers are professionals who are expert valuers. They should have knowledge of the residential property market in your area and neighborhood.
• Title fees. The cost of registering your title (ownership rights) with the appropriate authorities.
• VA funding fee. 2.3% of the loan for a first refinance and 3.60% for subsequent ones. This fee only applies to VA loan types and is a one-time payment on closing.
• Credit report fee. $20 to $30. This is what it costs your lender to access your credit report.
• Prepaid interest. This should be relatively small. It covers the interest that will become due between the day on which you close and the one on which you make your first monthly payment.
• Discount points. These are optional. If you choose to buy them, they’ll get you a lower mortgage rate. Pay 1% of the loan amount upfront and you could typically lower your interest rate by 0.25%. Pay more and you’ll save more.
• Title insurance. The policy itself often costs $550-$650, but there will likely be other fees for title searches ($150, up to $1,000+ for an exhaustive check). Even if you refinance with the same lender, they will likely insist you need a new policy. This protects your lender if some unknown challenge to your ownership rights emerges.

Escrow closing costs for mortgage refinances are different

There’s another form of closing costs that we need to treat separately. And those are payments into an escrow account. These are advance payments for things like property taxes, homeowner’s insurance and flood insurance.

A lender can demand you pay between four and eight months of property taxes in advance, plus 12-18 months of homeowners insurance.

You already have an escrow account on your existing mortgage, but you need another for your new mortgage. Your previous lender should refund the contents of your old escrow account within a month or two.

But escrow on refinances is a special case. You really don’t want to be paying those down (plus interest) over 30 years when you’re actually only borrowing for a couple of months. If you need an escrow account and can borrow, take out a personal loan to cover the amount. Make sure it’s one without prepayment penalties, so you can clear your balance when the old funds arrive. Just time your borrowing carefully so you don’t mess up your credit score.

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How high are the costs associated with a no-closing-cost refinance?

We explained earlier that you’re likely either to pay a higher mortgage rate or to increase your mortgage balance if you choose a no-closing-cost refinance option. That will break down to different total amounts depending on your specific situation.

You can use The Mortgage Reports’ refinance calculator to model some figures. You’ll need to make some assumptions about the rate you’re likely to be offered, given your credit score and existing debts.

See what happens to your monthly payments and the total you pay when you increase your rate or add your closing costs to your loan amount.

Scenario #1: Higher Rate

When we tried, we assumed a $250,000 loan balance and a 3% rate. Monthly payments came in at $1,070. And the total interest payable over 30 years was $131,500. Those figures are our baseline because we hadn’t at that point adjusted for avoiding closing costs.

Then we bumped up the rate to 3.25% (you may pay less than that) to allow for “no” closing costs. Monthly payments came in at $1,105. And the total interest payable over 30 years was $144,000.

So the higher rate added $34 a month to payments. And $12,500 in extra interest.

Scenario #2: Higher Loan Balance

Then we tried the alternative. We added $5,749 (the ClosingCorp 2019 average, including taxes) to the loan balance to make it $255,749. The rate remained at 3%.

That resulted in a monthly payment of $1,095 and total interest payable over 30 years of $134,491.

So the higher loan balance added $24.24 to each monthly payment and $2,976 in extra interest payable.

The Bottom Line

Using our assumptions, that makes rolling up your closing costs into your new mortgage balance more affordable. But our assumptions might not match your refinance circumstances so be sure to talk with your lender. The difference might be smaller than in our scenario.

And remember, all this stuff is negotiable. Get quotes from multiple lenders. Compare those loan estimates side by side. And then call around, playing each lender off against the other to secure your very best deal.

When is a no-closing-cost refinance a good option?

If you’re planning to move or refinance again soon

Taking a no-closing-cost refinance loan makes more sense the shorter the time you expect your mortgage loan to last.

In particular, if you’re expecting to move or refinance again within the next five years, it suddenly becomes much more attractive. After all, you’d be making your higher monthly payment for only 60 months (five years) instead of 360 months (30 years).

If you’re anticipating downsizing, upsizing or relocating, rerun your repayment figures. Because that makes a big difference to your math.

Similarly, if you anticipate mortgage rates will keep falling (or if you think your personal finances will improve and make you eligible for a better deal) you may want to refinance again in a few years. And that changes the math for the same reasons.

If you can’t afford closing costs

Finally, you may want no-closing-costs for the simple reason you can’t afford to pay closing costs at the time of the refinance. Again, this is often a perfectly legitimate reason. Just run the numbers — or chat with a mortgage broker — to make sure your decision makes sound economic sense.

One of the best things about refinancing is that the answer to whether it’s a good or bad idea is easily discoverable through math. Just use refinance calculators and check your loan estimates to determine how much you could save.

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