Click To See Today's Rates

Posted 03/09/2016

Zero-Closing Cost Mortgage: Refinance Your Mortgage For Cheap

Refinancing your home with a zero-closing cost mortgage loan

Zero Closing Cost Mortgages

A zero closing cost mortgage is a mortgage for which all closing costs are paid by the mortgage lender instead of by the borrower. In exchange for paying the closing costs on the borrower's behalf, the mortgage lender raises the loan's interest rate, usually by 12.5 basis points (0.125%).

Consumers Report Higher Loan Closing Costs

According to Bankrate.com's annual closing cost survey, the costs of a typical mortgage are rising.

Closing costs rose 6% last year, and have trended higher since. Banks say that costs are rising because of  new regulations which require more manpower. Many have elected to pass their higher costs on to their consumers.

As a mortgage borrower, though, how much you'll pay in closing costs will depend on your specific mortgage loan. The type of mortgage you use will affect your costs; as will the size of your loan, and the state in which you live.

VA loans, for example, are sometimes more costly as compared to USDA loans; and streamline refinance programs which don't require a home appraisal can help to keep your costs low.

Regardless of your loan type, however, you have ways to minimize what your purchase loan or refinance will cost you.

It helps to have a good strategy.

Click to see today's rates (May 30th, 2016)

What Are Mortgage Closing Costs?

Mortgage closing costs are the fees accompanying a mortgage transaction. They are charges assessed specifically because a mortgage transaction is taking place.

All mortgage loans come with costs. These costs can be spilt into two categories: Lender Fees and Third-Party Fees.

Lender Fees

Lender fees are fees paid to the lender, specifically, for the service of handling your loan. Lender fees are listed within Section 800 of a Good Faith Estimate.

Unfortunately, banks can "name" their fees whatever they like -- there's no standardization across lenders. As a result, it can be a challenge to compare lender fees between two or more banks because the nomenclature is often so different.

One bank's "Processing Fee" is another bank's "Underwriting Fee". Same service, different name.

Therefore, when you're comparing lender fees among two or more banks, it's best to ignore the individual line items. Instead, compare the sums of the lender fees listed.

It doesn't actually matter what the lender calls its fees -- what matters is what you're paying.

According to Bankrate.com, Section 800 lender fees are up close to 10% from last year.

Third-Party Fees

The second type of closing cost is a Third-Party Fee.

A Third-Party Fee is a closing cost paid to a company other than your lender.

Third-party fees include appraisal costs, costs for a credit report, and fees paid to a title company handing your mortgage loan settlement.

Third-party fees are outside of a mortgage lender's control, and will be the same no matter which lender you choose. Therefore, don't select your lender based on third-party fee estimates.

Since last year, third-party mortgage fees are down 1.5 percent.

Click to see today's rates (May 30th, 2016)

Reducing Your Loan Closing Costs

With current mortgage rates low, there are more than five million U.S. households potentially currently eligible to refinance.

There are many reasons to refinance, too.

  • You can lower your mortgage rate and get lower monthly payments
  • You can switch from a fixed-rate to an ARM, or vice versa
  • You can reduce your loan term to 15 years, saving big on mortgage interest
  • You can cancel your mortgage insurance premiums immediately
  • You can take "cash out" to pay for home improvement or other wants

You can pretty much do anything with a refinance. The key is to not let closing costs deter you.

Yes, every mortgage refinance requires closing costs. But, that doesn't mean that refinancing is going to be losing proposition for you.

You have the ability to reduce your closing costs on any mortgage refinance and, oftentimes, you can have your lender eliminate closing costs altogether.

Just remember that, as a borrower, you have three options for how you'll pay closing costs to your bank.

  1. You can pay your costs with cash at closing
  2. You can add/roll your closing costs to your loan balance (for refinances)
  3. You can waive your closing costs via a zero-closing cost mortgage

Each method has its advantages.

When you pay your costs with cash at closing, you often get access to the lowest combination of mortgage rate and loan size. Because your mortgage rate is reduced, you'll pay less interest to your lender over the term of the loan,whether it's a 30-year fixed, 15-year fixed, or something else.

When you opt to "roll your costs" into your loan, the funds of your bank account are not used to help close your mortgage. For households building an emergency cash reserve, or for families wanting to hold bank account balances high, rolling your costs can be sensible.

Lastly, you can choose to waive your closing costs altogether. You do this via a zero-closing cost mortgage.

Zero-closing cost mortgages are exactly what they sound like -- they are mortgages for which the homeowner pays absolutely no closing costs. With a zero-closing cost mortgage, nothing is added to your loan balance, and nothing is "hidden" in the figures.

All fees in a zero-closing cost loan are paid by the lender. None are paid by you. In exchange for paying your costs, the bank will ask you to accept a slightly higher mortgage rate than today's mortgage rate. The increase is typically 12.5 basis points (0.125%) for an average-sized loan.

As an illustration of how this works, let's say a homeowner in Loudoun County, Virginia wants to refinance at the local mortgage loan limit of $625,500.

In this example, rolling closing costs into the loan cannot be not an option because the new loan size would exceed the maximum allowable loan size. So, the homeowner opts for a zero-closing cost mortgage instead.

Assuming today's mortgage rate is 3.50%, the homeowner would get a rate near 3.625% from his lender and, in return, closing costs would be waived.

Note that there's no trickery with a zero-closing cost loan. Your closing costs aren't being "rolled in" to your loan balance, which increases the amount you owe on your home; and, your loan terms aren't changing because your fees are being paid by the lender.

For many, the zero-closing cost refinance is the safest, smartest way to refi.

Conventional Mortgages & Closing Costs

Conventional mortgages via Fannie Mae and Freddie Mac offer the fewest opportunities to save on closing costs.

In general, conventional mortgage rates are higher as compared to FHA loans and VA loans; and documentation requirements can be more strict, too. Because there's additional paperwork, conventional loans often require more manpower from your lender, and that increases the likelihood of fees.

When you want to save on a conventional mortgage purchase loan or refinance, then, the best way forward is to seek a low- or zero-closing cost mortgage.

FHA Mortgages & Closing Costs

For homeowners with existing FHA loans, zero-closing cost loans are common -- especially when used in conjunction with the FHA Streamline Refinance program.

The official FHA guidelines state that FHA Streamline Refinance loans require neither a home appraisal nor a credit score check. Because these items are unnecessary, they don't show up as third-party charges on a Good Faith Estimate, which lowers the loan's overall costs.

When you're comparing mortgage lenders and their rates for the FHA Streamline Refinance, make sure to ask about your zero-closing cost options. FHA refinances are among the most affordable ways to reduce your monthly payments.

VA Mortgages & Closing Costs

Similar to FHA loans, borrowers with a VA mortgage have multiple ways to reduce their loan closing costs. Use of the VA streamline refinance program -- the Interest Rate Reduction Refinance Loan (IRRRL) -- is one such way.

With the VA IRRRL, home appraisals are unnecessary, credit checks aren't performed, and closings are typically scheduled within 25 days. Waiving the appraisal saves up to $500, and faster closings lead to cheaper mortgage rate locks.

Zero-closing cost mortgages can eliminate whatever remaining VA loan costs are assessed, but costs are typically small for this type of refinance.

What Are Today's Mortgage Rates?

Don't let a fear of closing costs keep you from pursuing a refinance. The benefits of a refinance often outweigh the costs -- especially when there are zero costs whatsoever.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Click to see today's rates (May 30th, 2016)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

3 Testimonials

Sarah M. Office Manager

The Mortgage Reports has been an invaluable resource to me -- it helped me to pick the sweet spot to refinance. Thanks!

Thomas D. Software Developer

As a first time home buyer, The Mortgage Reports has been the only voice that I can trust, and the expertise has been helpful.

Mohammed Y. Retired

The Mortgage Reports is informative and I read it daily. I am grateful for the knowledge I have gained.

2016 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)