A no-closing-cost refinance may sound wonderful, but it’s important to understand that it means rolling the closing costs into the new mortgage or exchanging them for a slightly higher interest rate. Because you’ll either fatten your loan principal or pay a higher rate, your monthly payments and total interest paid will likely be more than if you had paid the closing costs with cash. However, a no-closing-cost refinance can help some homeowners make their finances more manageable.
Note: SoFi does not offer no-closing-cost refinance at this time. However, SoFi does offer traditional mortgage refinancing and cash-out refinancing.
Read on to decide if a no-closing-cost refinance is right for you.
Table of Contents
- Key Points
- • A no-closing-cost refinance allows homeowners to refinance without upfront closing costs by rolling them into the mortgage or accepting a higher interest rate.
- • This option can lead to higher monthly payments and more interest over the loan’s life.
- • Closing costs usually range from 2% to 5% of the loan amount, which is a significant upfront expense.
- • Homeowners should evaluate the refinance break-even point to see if this option is financially beneficial.
- • This type of refinance is beneficial if you don’t have a lot of cash on hand to pay loan-related expenses at closing.
No-Closing-Cost Refinance: How Does It Work?
You know how they say that if something sounds too good to be true, it usually is? Well, that also applies in this case.
When you undertake a mortgage refinance, you’re taking out a whole new loan, hopefully with a lower rate or shorter term.
The costs to do so are usually 2% to 5% of the total loan amount. For a refinance loan of $300,000, for example, the range is $6,000 to $15,000, which is a lot to take in if you need to pay the costs upfront.
A no-closing-cost refinance means you get to take out a new mortgage without paying closing costs out of pocket, or you accept a higher rate for the new loan.
Let’s break it down.
Closing Costs? What Closing Costs?
When a borrower signs mortgage documents, a variety of fees and expenses come along for the ride, which you probably recall from signing your mortgage the first time.
Right away or after a set number of months, depending on the kind of mortgage they have, homeowners can attempt to lower their mortgage rate and shorten their loan term with a refinance or, if they’re sitting on enough home equity, apply for cash-out refinancing.
They may want to transition from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage — or from a fixed-rate mortgage to an ARM.
Some may want to refinance their FHA or USDA loan into a conventional loan to get rid of mortgage insurance; others may be looking to refinance their jumbo loan.
If rates have fallen or if your creditworthiness has significantly improved since you took out your mortgage, those are signs it might be time for a mortgage refinance.
But there’s no free lunch when it comes to closing costs; even with a no-closing-cost refinance, the mortgage refinancing costs add up.
Here are costs that might be rolled into the refinanced loan:
Lender fees: Borrowing money costs money. Your lender might assess an application fee, a processing fee, a credit report fee, and an underwriting fee. Most lenders charge an origination fee. Any points on the mortgage, aka discount points, may be rolled in.
Title insurance fees: A title search ensures that no one else can claim ownership of your home.
Appraisal fee: The home appraiser’s fee is usually charged early in the closing process, so you probably won’t be able to add it to the new loan.
Other closing costs can’t always be rolled into the new loan. These include:
• Prepaid property taxes
• Homeowners insurance
• Any homeowners association dues
If you compare no-closing-cost refinance offers, ensure that each lender is willing to cover the same items. And be aware that a lender that will cover lender fees, third-party charges, and prepaid items will also probably charge a higher rate.
The Cost of a No-Cost Refinance
Given the heft of closing costs, a no-cost refinance might be sounding better and better. But whether you opt to accept a higher rate or roll in the closing costs, you’ll likely still end up paying those costs over time.
And depending on their total amount, as well as the interest rate and mortgage term, closing costs can eclipse the savings you stand to gain by refinancing in the first place.
That’s why it’s important, given your anticipated new loan rate and term, to use a mortgage calculator and scour the loan estimates you’ll receive after applying for a mortgage refinance to find out the full amount you’ll pay over the life of the loan.
With any mortgage refinance that includes closing costs, it’s a good idea to look at the refinance break-even point: closing costs divided by the expected monthly savings. That will give you the number of months it will take to recoup the costs to refinance.
For instance, if a refinance adds $100 a month to your mortgage payment and your lender is covering $4,000 in closing costs, you’ll break even after 40 payments, or three years and four months.
Recommended: Mortgage Recast or Mortgage Refinance?
Pros and Cons of a No-Closing-Cost Refinance
No-closing-cost refinances have upsides and downsides to consider.
Benefits of a No-Closing-Cost Refinance
• This kind of refinance can help keep homeowners from owing a hefty bill all at once, allowing them to refinance if they don’t have a lot of cash on hand.
• By rolling costs into a home loan, you can keep cash on hand to use for things that are more important to you.
• If you opt for a higher rate, you won’t use up home equity on a no-closing-cost refinance.
Drawbacks of a No-Closing-Cost Refinance
• A higher interest rate may compensate for closing costs, but that can be costly over time.
• If the closing costs are added to the principal loan balance, borrowers very likely will pay more interest over the life of the loan than they would have if they’d paid closing costs upfront.
• If you are already close to a lender’s loan-to-value threshold, then adding in closing costs could push you to the very edge. You may even find that the new mortgage will require private mortgage insurance.
Recommended: Cash-Out Refinance vs. HELOC
Is a No-Closing-Cost Refinance Right for You?
If you stand to save money by refinancing your home — and if you’ll be in your home long enough that you’ll break even on the refinance — it might be worth footing the elevated interest rate or higher loan principal of a no-closing-cost mortgage refinance.
For those who don’t have the cash on hand to pay for closing costs upfront, this approach is the only feasible way to achieve a refinance at all.
If, however, you’re able to pay the closing costs upfront, the loan may be less expensive over its lifetime.
The Takeaway
With a no-closing-cost refinance, closing costs are either added to the new mortgage or exchanged for a higher interest rate. A no-cost refinance can make refinancing possible for those who can’t pay the closing costs upfront, but it’s important to look at costs over the life of the loan and your plans as a homeowner to ensure that it makes financial sense. (Note: SoFi does not offer a no-closing-cost refinance at this time. However, we do offer traditional mortgage refinancing and cash-out refinancing.)
SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.
FAQ
What is a free refinance?
Free refinance is just another name for a no-closing-cost refinance. Though borrowers who choose this option do not pay closing costs, they may find the costs are rolled into their loan, which can mean higher payments over the long term.
How much are refinance closing costs?
Refinance closing costs are typically from 2% to 5% of your loan amount, with costs depending on how much money you’re borrowing. Lenders may have differing fee schedules, but 2% to 5% is a good rule of thumb.
Does it make sense to refinance my home?
There are multiple factors to take into account when deciding whether to refinance your loan. Consider your closing costs, your credit score, and how long you plan to stay in your home.
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