Refinancing a mortgage typically comes with significant closing costs, but many lenders offer a no closing cost refinance option. This may be a good solution for anyone who wants to refinance their mortgage but doesn’t have ready cash to cover the regular cost of closing.
What is a No-Closing-Cost Refinance and How Does it Work?
When you refinance your mortgage, you’re essentially exchanging your existing mortgage for a new loan agreement with new terms that are more suited to your current circumstances. There are several fees associated with the process. All of these fees added together increase the cost of closing the transaction. These closing costs have to be paid upfront before signing the refinancing agreement.
With a no closing cost mortgage refinance there is no upfront payment which can be a relief if you’re strapped for cash. But that does not mean you won’t be paying any closing costs at all. Lenders who offer zero cost refinance recoup their fees by charging higher interest rates or bundling the closing costs into the new loan. These fees would be spread over the entire mortgage term. The incremental payments may offer you immediate financial relief, but you could eventually end up paying higher costs over the life of the loan.
Average Costs Associated with Refinancing a Mortgage
Just as your original loan, a mortgage refinance too has a number of closing costs. The exact amount you’ll pay will depend on a variety of factors including your state of residence, your loan balance, the lender, and the lender’s loan products among others. In most cases, these fees can add up to about 2% to 6% of the remaining loan balance.
Some of the fees that go into the closing costs include:
- Appraisal fees – Most lenders will require you to get an appraisal of your home’s value before extending a mortgage offer. The appraisal fee is what you’ll have to pay a professional appraiser to inspect your home and determine its value. Professional appraisers charge anywhere from about $300 to $500 or even more for their services.
- Credit reporting fees – Before finalizing the offer, lenders will want to determine whether you’re a creditworthy borrower. To do this, they will need to do a hard credit pull, which can cost about $25 to $50, depending on your state of residence. In most cases, lenders pass this credit reporting fee back to the borrower as part of the closing costs.
- Origination fees – This is a fee that lenders charge to generate and process the loan. It usually costs on average about 1% of the total loam amount.
- Attorney’s fees – These are fees that an attorney charges to review the refinance documents and ensure that everything is in order.
- Title fees – Title fees can cost around $450. It includes the cost of checking the property record for the title of the home to ensure that the property ownership or liens is free of any issues. These fees don’t apply when buying a new home.
- Mortgage insurance fees – Federal Housing Administration (FHA) loans have an upfront mortgage premium that works out to about 1.75% of the loan amount. This fee will apply you’re refinancing from another type of loan to an FHA loan.
All of these fees can add up to substantial closing costs. A no closing cost refinance allows you to close the transaction without any out-of-pocked expenses. While this sounds like a good deal, it does have its downsides. Here’s a look at the pros and cons of a zero cost refinance.
Pros & Cons of a No-Cost Refinance
#1. No cash needed upfront means you get to keep more money in your pocket that you can use for other more immediate expenses. For example, you can put that money to pay off more expensive debt such as credit card debt or other loans.
#2. Spreading the costs over a longer period of time instead of paying upfront puts a lesser strain on your finances.
#1. Rolling the closing costs into the loan could cost you more money in the long run as the lender may increase your interest rate or the principal balance. Both options will eventually increase your refinance rate.
#2. You may have to pay private mortgage insurance if the rolled-in closing costs push your loan-to-value ratio above 80%. This would leave you with less than 20% equity in your home, requiring you to purchase private mortgage insurance, increasing the cost of refinancing.
Should You Choose a No-Closing-Cost Refinance?
A no-closing-cost refinance may or may not be the best option for you depending on your circumstances.
A mortgage refinance with no closing costs may be a good option for you if:
- You don’t have ready cash to cover the closing costs upfront – In this case, a zero-cost refinance is the only way you can refinance to get better terms on your mortgage.
- You aren’t planning to stay in the home for much longer – The higher interest that you’ll be paying can add up to a considerable amount over the years. The longer you stay in the home, the more it will add up. If you’re only going to be staying in the home for another couple of years, the higher interest rate won’t really make a big difference.
- The higher interest rate is still lower than your current rate – Interest rates have dropped drastically and are the lowest they’ve been in years. Even if the lender charges a slightly higher interest rate to waive the closing costs, chances are the rate will still be lower than what you’re currently paying. Refinancing at a lower rate would mean lower monthly payments and lower interest costs over the loan term.
A mortgage refinance with no closing costs is not a good option if:
- You have the savings to cover the costs – Paying the closing costs upfront will cost you less in the long run. If you have the savings to cover the cost without compromising on your other requirements, setting the full amount outright is a far better option.
- You plan to stay in the home for more than a few years – If this is your permanent home and you have no immediate plans to move out, then paying the closing cost upfront is a better option. The longer you stay in the home, the more you’ll pay with the higher interest rate that comes with a no closing cost refinance.
- You want the most affordable payments possible – Higher interest rates and higher monthly payments are unavoidable with a no closing cost refinance. if you’re looking to refinance with the lowest interest rate and the lowest monthly payments, you’ll have to pay the closing costs upfront.
Refinancing your home with no closing costs is not universally good or bad. Taking the time to assess your financial situation and understand the pros and cons of choosing this option can help you make a more informed decision.