What Is a No-Closing-Cost Refinance?

A no-closing-cost refinance is a mortgage refinancing option where the lender covers the closing costs in exchange for a higher interest rate or by rolling the costs into the loan principal.

If you’re having trouble making payments on your mortgage loan, a refinance could present you with a flexible solution that doesn’t require you to sell your home. But refinancing a mortgage loan can also be expensive — which is not ideal if you’re already having trouble making your loan payments. A no-closing-cost refinance can help you get into a new loan without as much upfront cost. But these refinance options are not free so it’s crucial that you understand both the benefits and drawbacks before you sign on the dotted line.

What Is No-Closing-Cost Refinancing?

Most mortgage shoppers know that when you sign onto a loan, you’ll need to cover closing costs before you can move into the property you buy. Closing costs are expenses you pay your lender in exchange for providing a variety of services needed to legally close a home sale. When getting a mortgage, these closing costs pay for services like verifying that the seller of the home owns the title free of liens, verifying that your income is sufficient to cover the loan and ensuring that your property meets U.S. Department of Agriculture (USDA) or Federal Housing Administration (FHA) standards if you’re buying with a government loan.

What you might not know is that refinancing a mortgage loan also comes with closing costs. A significant percentage of your closing costs when buying a home go toward verifying your assets and preparing paperwork, which is also necessary when replacing your current loan with a new financing plan. Some examples of closing costs you might need to pay when you refinance may include:

• Underwriting fee
• Appraisal fee (if working with a new lender)
• Credit report fee
• Title search (if working with a new lender)

How Does No-Closing-Cost Refinancing Work?

In most cases, the cost of refinancing a mortgage loan is between 2% and 6% of your loan’s value at the time of refinancing. This means that if you’re refinancing a loan with a $200,000 balance, you could pay as much as $12,000 to get a new loan. Closing costs are due upfront when you sign onto your new loan.

If you can’t pay your closing costs upfront, your lender might offer you a no-closing-cost refinance. As the name suggests, a no-closing-cost refinance eliminates the closing cost requirement before you get your new loan. However, in exchange for waiving closing costs at the time of purchase, you agree to take on a loan with a higher balance equal to your refinanced balance plus the cost of your closing costs. You then pay this balance down as you pay down your original mortgage loan and build equity in your property.

For example, imagine you’re refinancing a loan amount of $200,000 and you cannot pay the $4,000 closing costs. With a no-closing-cost refinance, you would be able to sign on your new loan with zero closing costs required in cash. But you will accept a loan with a balance of $204,000 instead of $200,000 — that’s the original balance plus the balance of your closing costs.

No-closing-cost refinances are not free. While you don’t pay for your closing costs upfront with this type of refinancing, you end up paying more over time because you must pay your original balance plus the value of any interest that has accumulated. While it might not seem like it upfront, a no-closing-cost mortgage refinance usually ends up being more expensive than a standard refinance.

If you can afford to pay your closing costs on your refinance upfront, you can end up saving hundreds or even thousands of dollars by the time you own your home in full. But if you’re taking advantage of an immediate tangible benefit on your home loan and you’d need to finance closing costs anyway, a no-closing-cost refinance can provide more affordable rates when compared to personal loans or putting your closing costs on a credit card.

What Are the Average Closing Costs When Refinancing a Mortgage?

Closing costs when refinancing a mortgage typically range from 2% to 6% of the loan amount. The average closing costs for refinancing a mortgage can vary depending on various factors such as the loan amount, location and lender.

• Origination fee: Origination fee is charged by the lender for processing the loan and is typically around 0.5% to 1% of the loan amount.
• Appraisal fee: An appraisal is required to determine the current market value of the property being refinanced. The cost of an appraisal can be between $300 to $500.
• Title search and insurance: A title search ensures that the property has a clear title, while title insurance protects the lender in case there are any issues with the title. The cost can range from $500 to $1000.
• Points: Points are optional fees paid to reduce the interest rate on the mortgage. Each point is equal to 1% of the loan amount.
• Credit report fee: Lenders pull a credit report to assess the borrower's creditworthiness. This fee ranges from $30 to $50.
• Prepaid expenses: These include property taxes, homeowner's insurance and prepaid interest that the borrower needs to pay at closing.

Benefits of No-Closing-Cost Refinancing

No-closing-cost refinances come with a number of benefits, including:

Fewer Hurdles to Refinancing

From not being able to afford your monthly payments to taking advantage of lower interest rates, there are a number of reasons you might need to refinance your mortgage loan quickly. If you have everything in place to refinance but cannot afford closing costs, it can be worthwhile to take a no-closing-cost mortgage refinance loan.

Cheaper Short-Term Option

Depending on the balance of your closing costs and your interest rate, rolling your closing expenses into your loan might add only a few dollars to your mortgage premium. In many cases, no-closing-cost refinances are more affordable in the short term, allowing you to pay back any money you borrow over the course of 15 to 30 years according to your term.

Can Make Future Refinancing More Affordable

If you know you’re going to refinance your loan again in the future, it doesn’t make much sense to pay your closing costs upfront each time. By rolling your closing costs into the value of your loan, you can refinance this balance again at a later date instead of saving money and paying upfront.

Drawbacks of No-Closing-Cost Refinancing

It's important to understand that no-closing-cost refinancing isn't free. It's essential to weigh the costs and cons to determine whether this option is the best choice for your financial situation. Be sure to consider the following before you sign on a new loan.

Higher Rates

Most mortgage lenders charge higher interest rates on refinances with no closing cost stipulations. The increased interest rates associated with no-closing-cost refinances are meant to offset the costs that would normally be covered by closing fees. In other words, the lender is still making a profit from your loan, but it’s doing it by charging you more in interest rather than asking you to pay upfront fees. As a result, you may wind up paying thousands of extra dollars in interest over the life of your loan if you choose to go this route.

Makes it More Difficult to Own Your Home

When you take a no-closing-cost refinance, the balance of your closing costs is added to the principal balance of your loan. You pay them back over time with interest the same way you pay off what you owe on your home. Rolling closing costs into your loan means you’ll spend more time paying back what you owe.

Potentially Higher Monthly Payment

Because you’re accepting a higher-value loan, no-closing-cost refinances result in higher monthly payments when compared to standard refinances.

Most drawbacks of no-closing-cost refinance have to do with extra expenses. If you need to refinance quickly, a no-closing-cost option might be right for you. But if you can afford to pay your closing costs upfront, you’ll save money over the course of your loan.

Compare Refinance Lenders

As a homeowner, you have dozens of choices when it comes to selecting a bank or lender to provide your loan refinancing services. The best lender for your needs will vary depending on the type of loan you have, the reason you want to refinance your loan and where you live. Keep in mind that every lender that offers refinancing may not offer no-closing-cost refinancing options, and qualification standards for no-closing-cost loans may vary from standard refinancing.

How to Determine Whether a No-Closing-Cost Refinance Option is Right for You

Refinancing a mortgage is a great way to save money on monthly payments and reduce overall interest costs. But the closing costs associated with refinancing can be intimidating and create a barrier for many homeowners looking to take advantage of lower interest rates. This is where a no-closing-cost refinance option can be an attractive alternative.

A no-closing-cost refinance loan eliminates the upfront costs associated with refinancing by rolling those costs of the home loan into the interest rate or loan amount. While this can be tempting, it's important to do the math and determine whether it's the right move for you.

First, consider the length of time you plan to stay in your home. If you plan to move or refinance again in the next few years, a no-closing-cost option may make sense. But if you plan to stay in your home for a longer period of time, the higher interest rate associated with this option could end up costing you more in the long run.

Another important factor to consider is your current financial situation. If you don't have the funds to cover closing costs upfront, a no-closing-cost option may be your only choice. But if you are in a position to pay upfront costs, it's worth comparing the savings and long-term costs associated with both options. Ultimately, determining whether a no-closing-cost refinance option is right for you requires careful consideration of your circumstances and financial goals.

Considerations for Choosing the Best No-Closing-Cost Refinance Option

By avoiding upfront fees, borrowers can refinance their existing loans with minimal out-of-pocket expenses. It's important to consider the long-term costs of a no-closing-cost refinance as these loans typically come with higher interest rates and may extend the life of your mortgage.

To ensure you are making the best decision for your financial situation, it's important to shop around and compare multiple lenders, carefully review all terms and conditions and seek the guidance of a qualified mortgage professional. With the right strategy and approach, a no-closing-cost refinance can be a valuable tool for achieving your financial goals and securing your future.

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