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If you want to refinance your mortgage but are short on cash, you can avoid out-of-pocket expenses by choosing a no-closing-cost mortgage refinance.

But don’t make the mistake of thinking you’re getting out of paying closing costs altogether — typically you’ll pay a higher interest rate, or the closing costs will be bundled into your loan.

Costs of refinancing a mortgage

For many people, refinancing a mortgage can make a lot of sense. You can end up with a lower interest rate, lower monthly payments and, in some cases, cash that you can use for renovations or to pay off debt. However, refinancing a mortgage can be costly, with closing costs easily running into the thousands of dollars.

There are a number of costs associated with refinancing a mortgage. You’ll typically have an application fee, lender origination fees, title fees, as well as fees for the home appraisal to name a few.

You may also have to come up with money for insurance and property taxes to put into an escrow account. Some people choose to pay for points when they refinance. When you buy points, you agree to pay additional fees when you close on your loan to get a lower interest rate.

When you add up all of these fees, closing costs can easily end up being 5% to 6% of the loan amount.

For a $150,000 refinance, that could mean as much as $9,000 that you would be expected to pay at closing.

If you are refinancing because you need access to extra cash or because you are struggling to pay your current mortgage, those closing costs could be more than you can financially handle.

Can closing costs be waived?

It is possible that a few of your closing costs may be waived outright.

For example, in a competitive landscape, some lenders will waive certain fees, such as the application fee, to get your business. However, that still leaves a hefty amount of money that you are expected to pay. In some cases, a no-cost refinance could be a good solution.

Pros and cons of a no-fee refinance

The biggest benefit of taking out a no-closing-cost mortgage is having the ability to keep more money in your pocket. You’ll apply for the loan, submit any documentation that the lender needs and have your loan approved.

The biggest benefit of taking out a no-closing-cost mortgage is keeping more money in your pocket.

When you go to closing, you won’t have to fork over any cash. While that might sound like a winning proposition, a no-closing-cost mortgage will likely cost you money in the long run.

Here’s why refinancing with no closing costs may not be as good as it looks. Even if you don’t have to pay the closing costs upfront, the money still needs to be paid. Lenders aren’t offering you a mortgage loan for free. Rather, they are giving you the option of spreading your closing costs out over the life of your loan, and you will pay for the privilege to do so.

When lenders offer no closing cost mortgages, there are two ways they can pass the costs along to you. One method sometimes referred to as a “no cash” loan, is to wrap the closing costs into the loan, which increases the amount of principal you must repay. Another method is for the lender to actually pay the closing costs, and recoup their costs by charging you a higher interest rate.

Either way, you’ll pay more for the mortgage over the life of the loan. Say your closing costs are $5,000. If you wrap that into a 30-year loan at a 4.5% interest rate, that extra $5,000 in principal will cost you $4,120 in additional interest over the life of the loan.

Or, let’s say you’re refinancing into a $150,000 15-year mortgage that you could have locked in at 4.5% if you’d paid the closing costs upfront. If you agree to pay 4.8% for the same loan because the lender will pick up the closing costs, you’ll pay $4,164 in additional interest on your mortgage.

Who benefits from a no-closing-cost mortgage?

When deciding between a no-closing-cost mortgage and a traditional mortgage, there are certain factors you should weigh.

Financing closing costs may be the only option if you want to refinance your mortgage but don’t have cash on hand.

You may desire a lower monthly payment or be able to get a lower interest rate than what you currently have but you don’t have money in the bank to pay the upfront fees. If you’re struggling to pay your current mortgage or you need extra money for your daily expenses, a refinance may be the best decision you can make, and a “no cost” mortgage can be your means of getting what you need — even if it’s not really “no cost.”

A no closing cost mortgage may be a great option if you’re not planning to own the home for many years.

It may also be a good option if you don’t have a lot of savings. Experts recommend that you have three to six months of savings in an emergency fund. If you don’t have that much money, you may not want to use the savings that you do have to pay for closing costs.

A no closing cost mortgage may also be a great option if you are not planning to own the home for many years.

For example, if you think you will sell the home in the next five years, you won’t be paying that higher interest rate for the next 30 years.

So in that scenario, you may save money in the long run by taking out a no cost mortgage. It’s important to do the math and compare the cost of paying the closing costs upfront to the cost of financing the closing costs over the life of the loan.

How to Find a No-Cost Refinance

When shopping for a no-closing-cost refinance, make sure you check with multiple lenders to see what types of rates they will offer you.

If you have access to some funds that you could spend on closing costs, take the extra step of seeing if some lenders might waive certain fees or have lower closing cost requirements that might fit your budget.

If you are convinced that a no-closing-cost loan is for you, you’ll naturally want to see which lender will offer you the lowest interest rate. However, also take a look at what fees each lender charges in closing costs for refinancing. Even though you aren’t paying for them upfront, you still want to pay as little in closing costs as possible. Remember, the lower the amount in closing costs, the less money you’ll be wrapping into your mortgage.

A refinance strategy is a personal decision that is dependent on your financial goals. If refinancing is a big priority for you and you don’t have a lot of money on hand for closing costs or you are only planning to keep your home for a short period of time, a zero closing cost mortgage could be a winning proposition.