Is a No-Closing-Cost Refinance Worth It?

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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, in many cases, the closing costs will be bundled into your loan, increasing your balance and monthly payment along with it.

What is a no-closing-cost refinance?

A mortgage refinance comes with closing costs just as your original loan did. These costs include the lender’s origination fee, any mortgage points you buy, the cost of an appraisal, and other expenses as well. Typically, closing costs total 2% to 5% of your home’s price, though it varies based on your location and lender.

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 or origination fee, in order to get your business.

However, it’s unlikely they’ll waive every fee, and you may still be left with costs that exceed the amount you want (or are able) to pay. If this is the case, rolling the closing costs into your loan balance and spreading them out over time may be a smart option.

Check Out: How to Refinance Your Mortgage in 6 Easy Steps

How much does financing usually cost?

According to Freddie Mac, the average cost to refinance a mortgage is around $5,000. The exact amount you’ll owe will depend on your lender, their loan products, where you live, and your loan balance.

Some common fees that go into this amount include:

Pros of a no-cost refinance

There are two major benefits when it comes to taking out a no-closing-cost refinance:

• You keep more money in your pocket up front
• You can reach your breakeven point sooner

Learn More: When to Refinance a Mortgage

Cons of a no-cost refinance

With a no-closing-cost refinance, there are two notable disadvantages:

• It might cost you more money in the long run, either by increasing your refinance rate or raising your loan balance
• You may have to pay private mortgage insurance (PMI) if the rolled-in closing costs of the new loan put your loan-to-value (LTV) ratio below 80%

A no-closing-cost mortgage will likely cost you more money in the long run, either by increasing your refinance rate or raising your loan balance. 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.

Should you choose a no-closing-cost refinance?

No-closing-cost refinances aren’t right for everyone, but they can be a wise move in certain situations.

Here’s when it might be smart to choose a no-closing-cost refinance:

• When you’re short on savings: If you just don’t have the cash to cover upfront closing costs, but refinancing would save you significantly in the long run, it might be worth considering.
• When it will still lower your interest rate: Even if your lender charges you a slightly higher rate to forgo closing costs, there’s a good chance it’ll still be lower than your current loan’s rate. This would mean a lower monthly payment and less in interest costs in the long run.
• When you don’t plan to be in the home that long: No-closing-cost refinances cost you more in interest the longer you stay in the home. If you know you won’t be sticking around more than a few years, it might be a good option.

Learn More: Complete Checklist of Mortgage Refinancing Requirements

Here’s when you should probably just pay the upfront closing costs:

• When you have the savings to handle it: You’ll pay less in the long run if you just settle your closing costs upfront. If you have the savings available to do so, it’s probably for the best.
• When you plan to stay in the house for the long haul: If you know this is your forever home, then paying upfront is your best bet. The longer you’re in the house, the more that no-closing-cost refinance will cost you.
• When you want the lowest payment and interest rate possible: No-closing-cost refinances will almost always come with a higher monthly payment and, sometimes, a higher interest rate, too. If you’re looking for the most affordable payment possible, paying your closing costs upfront is the way to go.

Compare multiple lenders

Make sure to shop around if you decide on a no-closing-cost refinance. Not every lender offers these options, so comparing at least a few companies can ensure you get the loan you want at a rate you can afford.

Credible makes refinancing easy. You can see personalized rates from our partner lenders in the table below in just three minutes. We also provide transparency into lender fees that other comparison sites don’t.

About the author

Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and a contributor to Credible. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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