No Closing Cost Refinance : Reduce Your Rate Without The Fees

August 23, 2016 - 5 min read

Lower The Cost Of Refinancing

Thirty-year fixed rates are in the threes, and homeowners have few reasons left to delay a refinance.

But many are holding out for one reason: the fear of paying closing costs.

Mortgages always come with fees, but whether you pay them yourself is optional. Lenders offer refinance structures in which you avoid paying most or all your closing costs.

The average U.S. homeowner sells their home or refinances every five to seven years. Many rework their living situation or financing much more often.

A no-cost refinance could eliminate the risk of paying money toward a loan you may not have for long.

Verify your new rate

What Are Mortgage Closing Costs?

Whether you’re buying a home or refinancing one, all mortgage loans come with fees.

“Closing costs” are fees associated with obtaining a mortgage loan.

Lender fees can vary widely according to where you live. A recent Bankrate study reported that Hawaii and New Jersey were among states with the highest closing costs.

Residents of Ohio and Idaho can expect the lowest mortgage fees, on average.

Typically, homeowners will pay between two to five percent of the loan amount for closing costs.

But homeowners with small loan amounts will pay a higher percentage of fees, and vice versa.

For example, if you refinance a $50,000 mortgage, you might pay upwards of five percent of the loan amount in fees for a total of $2,500.

But a $400,000 refinance should not come with anywhere near that percentage. The homeowner could incur as little as one to two percent in loan closing costs.

Verify your new rate

Closing Costs Versus Prepaid Expenses

As a mortgage refinance applicant, you should be aware of the difference between closing costs and prepaid expenses.

Closing costs are the fees directly associated with getting the loan. These include the following.

  • Loan origination fee
  • Credit report fee
  • Appraisal fee
  • Title insurance fee
  • Recording fees

Prepaid items, though, are expenses associated with owning the home. You must pay these whether or not you are getting a new mortgage, or carry financing on the home at all.

Property taxes and homeowner’s insurance are the two most common prepaid expenses.

Lenders will collect between two and 14 months’ worth of these expenses at closing. The reason: if these costs aren’t paid, the lender’s collateral — your home — is in jeopardy. If the house is destroyed or taxes aren’t paid, the lender and the borrower could lose the home permanently.

But these costs are not “closing costs” just because the lender collects them. Again, they are not mortgage-related fees.

And, you can never pay prepaid items twice. In fact, the homeowner receives any unused prepaid expenses from their previous mortgage whenever they refinance.

For this reason, many homeowners choose to pay their prepaid expenses out-of-pocket. Lending rules state that homeowners can roll prepaid expenses into the new loan amount or have the lender pay them. Still, applicants often choose to lower their loan balance and rate by prepaying taxes and insurance from a checking or savings account.

How Does A No-Closing-Cost Refinance Work?

Adding two to five percent of the loan amount to your new balance for closing costs may seem counter-intuitive. That’s why a no-cost refinance may be just right for your situation.

Generally, a no-closing-cost refinance is one for which the homeowner opts for a slightly higher interest rate. In return, the lender offers a lender credit that offsets the costs.

So, the term “no-closing-cost” refinance is a bit misleading. Mortgage loans always come with a cost. Who pays them is up to the applicant.

The higher the interest rate, the more profit the refinance generates for the lender. But don’t assume the lender pockets the extra cash. By law, lenders can collect only a certain percentage of the proceeds, and issue the rest to the applicant in the form of lender credits.

So with a “higher” the interest rate, you have access to a greater credit.

Note that today’s “high” rates are much lower than “low” rates of just a few years ago. This is why the popularity of no-closing-cost refinancing is accelerating.

Homeowners can get an ultra-low rate and still have the lender pay most or all the costs.

But not everyone will qualify for a no-closing cost refinance.

An applicant with a low loan balance may not be able to generate enough proceeds to cover all costs.

For example, a homeowner wants to refinance a $75,000 mortgage. He accepts a slightly higher rate and in return has access to a 1% lender credit. This is only $750, and, perhaps, not enough to cover all the costs.

The same borrower with a $500,000 refinance may be able to pay most or all his loan costs with that same 1% lender credit.

However, even when a loan amount isn’t large enough to cover the full costs, homeowners may still qualify for reduced closing costs.

In any case, shop around. Not all lenders offer no-cost refinance options. Some will offer greater credit amounts than others. Get a quote from three or four lenders and ask them to match or beat other offers.

Verify your new rate

Should You Let The Lender Pay Your Closing Costs?

Most of the time, the lower the interest rate, the better the savings for the homeowner. However, a no-cost refinance can make sense for some homeowners.

Generally, homeowners may want to consider a no-cost refinance in a few cases.

  • They don’t plan to stay in the home for more than a few years
  • They tend to refinance frequently

If you’re one of these two types of homeowners, it may be ideal not to pay thousands of dollars in closing costs, but still save on your monthly payment with a lower interest rate.

For example, let’s say you are refinancing a mortgage balance of $200,000 and your lender’s closing costs are $3,000.

Your new 30-year fixed rate is 3.5% and your monthly principal and interest payment is $900.

Let’s assume that by refinancing, you were able to save $150 per month. That means it would take you twenty months to recoup your closing costs.

Now, let’s look at the same scenario at 3.875% with no closing costs. Your new principal and interest payment would be $940.

Your savings drops from $150 per month to $110. But you paid zero closing costs, and your recoup time is zero months. You start saving immediately.

A homeowner that plans to move within two years still has good reason to refinance.

What Are Today’s No-Cost Refinance Rates?

As mortgage rates continue to hover near all-time lows, a no closing cost refinance could be the perfect way to refinance without paying thousands of dollars in fees, and still get an extremely low rate.

Shop and compare the differences in interest rates, with and without paying closing costs, to determine which type of loan is best for your needs.

Take a look at today’s low rates now. Your social security number is not required, and all rate quotes come with instant access to live mortgage credit scores.

Time to make a move? Let us find the right mortgage for you

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.