What Is a No-Closing-Cost Refinance?

By Jamie Cattanach · December 19, 2022 · 6 minute read

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What Is a No-Closing-Cost Refinance?

A no-closing-cost refinance sounds divine, but it’s important to understand that you will either roll the closing costs into the new mortgage or exchange them for a slightly higher interest rate.

Because you’ll either fatten your loan principal or pay an increased rate, your monthly payments and total interest paid will likely be higher than if you had paid the closing costs with cash.

Still, a no-closing-cost refinance can help some homeowners make their finances more manageable. Read on to decide if a no-closing-cost refinance is right for you.

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’s true in this case, too.

When you refinance a mortgage, 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, that is $6,000 to $15,000, a big pill to swallow if the costs are to be paid 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 remember 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 or, if they’re sitting on enough home equity, apply for cash-out refinancing.

They may want to transition from an adjustable-rate mortgage to a fixed-rate mortgage — or 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 among the 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 expenses that might be rolled into the refinanced loan:

Lender fees. Borrowing money costs money! Your lender might assess an application fee, processing fee, credit report fee, and underwriting fee. Most but not all 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.

Other closing costs can’t always be rolled into the new loan. They include:

•   Prepaid property taxes

•   Homeowners insurance

•   Any homeowners association dues

•   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

If you compare no-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 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’re still responsible for paying those costs over time.

And depending on their total expense, 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 loan estimates you’ll receive after applying for a mortgage refinance to know 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.

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

So-called 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, making it possible 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 other purposes that may be 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

•   The closing costs may be compensated for in the form of a higher interest rate, which 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 your refinance lender won’t let you cross the 80% loan-to-value threshold when closing costs are added, you won’t have enough room to include the closing costs. If the lender will allow a higher than 80% LTV ratio, the new mortgage typically 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, doing so can help keep the loan 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.

SoFi offers a traditional mortgage refinance and cash-out refinance at competitive interest rates.

And SoFi allows qualifying borrowers to roll closing costs into their mortgage.

When you’re ready to refinance, check out SoFi’s options.

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