Is There Such a Thing as a No-Cost Refinance?

Refinancing can reduce your monthly payments, but it means taking out a brand-new loan and paying related closing costs. This often requires homeowners to come up with thousands of dollars just to refinance their mortgage.

Some lenders, however, offer no-cost refinances, although the name is a little misleading. Is there such a thing as a no-closing-cost refinance, or are these loans just a marketing gimmick?

Can I Get a No Closing Cost Refinance?

So, is a no-closing-cost refinance real? The answer is both yes and no. Many lenders do offer refinance loans that don’t require you to spend any of your own cash. Simply put, you can refinance and bring nothing to the closing table.

But as you’ve probably guessed, it isn’t free money. Ultimately, you’re paying for your closing costs in one way or another. When a lender advertises a “no closing cost refinance,” what they mean is that they’ll cover your closing costs and either:

1. Add the amount to your existing loan balance
2. Charge you a slightly higher interest rate on your refinance

Note: Lender-paid closing costs do not have to be all-or-nothing. You can pay for some of your closing costs while the lender covers the rest if that suits your needs better. Also, you may sometimes need to pay for your prepaid taxes and insurance at closing. It’s generally not wise to finance a year’s worth of homeowner’s insurance and 3-9 months of property taxes when your original lender will refund you a similar amount a few weeks after closing.

Rolling Closing Costs Into Your Loan Balance

One way that lenders offer no closing cost refinances is by paying for your expenses and then adding the total to your new loan balance. For example, if you were refinancing a $250,000 loan with $6,000 in closing costs, you could pay nothing out of pocket and accept a new loan balance of $256,000.

When you roll your refinance closing costs into your loan balance, you’re essentially paying for them with your home’s equity. 

How would this affect your monthly payments and interest costs on a 30-year fixed-rate mortgage? Let’s take a look.

Loan Balance	Interest Rate	Monthly P&I Payment	Lifetime Interest
$250,000	6.75%	$1,622	$333,738
$256,000	6.75%	$1,660	$341,748

In this scenario, wrapping $6,000 in closing costs into your loan would increase your monthly payments by $38 and result in paying an extra $8,010 in interest costs – on top of the $6,000 in additional principal – over the life of your loan.

This is why it’s wise to think twice about financing closing costs.

Taking a Higher Interest Rate (Lender Credits)

Another option for a no-cost refinance is to ask your loan officer for lender credits to pay the closing expenses. In exchange, you would accept a slightly higher-than-market interest rate on your mortgage. Nothing is added to your loan balance, but you will pay more monthly interest.

This plan might work well if you can drop your rate significantly, even when taking a higher-than-market rate. For example, your rate is 8% and market rates are 6.75%. You take 7.15% rate and still come out way ahead – and without cost.

Fleshing out this idea further, if your $250,000 refinance has estimated closing costs of $6,000, your lender may offer to pay them in exchange for a 7.15% interest rate instead of 6.75%.

How might this option impact your mortgage payments? Using our example rates above, accepting the higher rate would increase your monthly payment by $67 and result in $24,128 more interest paid over the life of the loan. Again, not such a great deal.

Loan Balance	Interest Rate	Monthly P&I Payment	Lifetime Interest
$250,000	6.75%	$1,622	$333,738
$250,000	7.15%	$1,689	$357,866

Is It Better To Pay Closing Costs Myself?

If you plan to stay in your home, keep your mortgage, and have the ability to pay your closing costs upfront, doing so will likely save you money.

However, if closing costs are the only thing standing between you and being able to refinance and slash your monthly payment, the immediate benefits of a no-cost refinance may far outweigh the downsides.

Let’s compare the numbers for three scenarios: paying the closing costs yourself, rolling them into your balance, or covering them with lender credits.

Example: You’re doing a $350,000 30-year conventional cash-out refinance to make some major home improvements you’ve been planning for years. Your quoted interest rate is 7%. Closing costs are estimated at 3% of your new balance, totaling $10,500.

You have the additional equity to increase your balance to $360,500 to pay for closing. Alternatively, your lender will cover the closing costs on your $350,000 loan for an interest rate of 7.5%.

Here’s what the numbers would look like with both of those options and if you paid the closing costs yourself.

	Self-Paid	Added to Loan	Lender-Paid
Due at Closing	$10,500	$0	$0
Loan Balance	$350,000	$360,500	$350,000
Interest Rate	7%	7%	7.5%
Monthly P&I	$2,329	$2,398	$2,447
Lifetime Interest	$488,281	$502,930	$531,010

Strategically Using a No Closing Cost Refinance

As we’ve demonstrated, a no-closing-cost refinance isn’t really free since you’re eventually paying for it in one way or another. Not only that, but you end up paying far more than if you just put forward the funds at closing.

However, if you only plan to have the loan a short time, you might as well have the lender raise your rate and pay for all the costs. 

If you keep the loan for a long time, your refinance break-even point is pushed out. But that becomes irrelevant if you plan to keep the loan for just a couple of years. 

When you do a no-cost refinance and take lender credits in exchange for a higher interest rate, the break-even point works in reverse. Here, the break-even would be when the cumulative extra costs exceed the amount you would have paid at closing.

For example, using our cash-out refinance scenario from above with a $350,000 loan and $10,500 in closing expenses, the extra costs from the additional 0.5% interest rate would top $10,500 after 89 payments. That means you would come out ahead if you plan to keep the loan for fewer than 7.5 years.

In practice, this could be the most advantageous if you plan to sell in a year or two but can cut your payments in the meantime with the lender paying all the closing costs.

How Much Are Refinance Closing Costs?

Closing costs will vary based on your loan balance and the type of refinance that you’re applying for. With conventional refinances, closing costs typically run between 2% and 4% of the total loan. On a $200,000 balance, you could expect to pay between $4,000 and $8,000.

However, other types of loans may come with additional costs:

• FHA loans have an upfront mortgage insurance premium (UFMIP) of 1.75%. However, if you’ve had your current FHA loan for fewer than three years, you may qualify for a partial UFMIP refund to offset the cost.
• VA loans have a funding fee of 0.5% for IRRRL streamline refinances and a fee of either 2.15% or 3.3% for cash-out refinances. Borrowers with service-related disabilities may be exempt from these fees.
• USDA loans have a 1% upfront guarantee fee attached to all new mortgages.

These program-specific fees could potentially double closing costs for some borrowers. If you were doing a $300,000 VA cash-out refinance with a 3.3% funding fee on top of 3% in standard closing costs, you could be on the hook for $18,900 just to close.

Getting the Best Deal on a No Closing Cost Refinance

They may all cover your closing costs, but not all no-cost refinances are the same. Like with any mortgage, some lenders will offer you a better refi deal than others. If you’re simply planning to respond to an advertisement to refinance with no costs, a little extra diligence will probably save you money.

In most cases, a lender advertising a no-closing-cost refinance will not offer you the best available deal right off the bat.

If you’re wanting to wrap the cost into your existing balance, watch out for companies that charge higher-than-normal amounts for line items like origination and underwriting fees. When asking for credits to cover the expense, the final rate will vary from lender to lender.

Apply with at least three different mortgage providers to get the best deal on a no-closing-cost refinance. While this may sound like a daunting task, it really isn’t. Once you have the required documents gathered for one loan officer, receiving quotes from additional companies is simple and painless.

By receiving multiple loan estimates, you can compare the anticipated closing costs side-by-side and use the most attractive offer to force the other lenders to compete on negotiable fees and overall interest rates.

Is a No Closing Cost Refinance Too Good to Be True?

It’s easy to see why someone would say that a no-closing-cost refinance is too good to be true: in most cases, you wind up paying for it through larger monthly payments. Although for borrowers who want to refinance but can’t come up with the closing costs, a no-cost refinance might be precisely what they’re looking for.

Plus, lender-paid closing costs may be the most cost-effective option for homeowners wanting to refinance now but move in the near-to-mid future.

To find out if you qualify to refinance with no money out of pocket, check out today’s mortgage rates and apply with a reputable refi lender serving your community.