No-cost refinance: Two refi options with no closing costs

Valencia Higuera
Valencia Higuera
The Mortgage Reports Contributor
May 16, 2022 - 8 min read

Explore a no-cost refinance

A no-cost refinance can reduce or eliminate your upfront closing costs. This doesn’t mean that you won’t have fees when refinancing. Rather, you won’t pay for them out of pocket.

Some homeowners avoid refinance fees by rolling them into the loan balance. Others get the lender to cover their fees in exchange for a higher rate.

Both options have their pros and cons, so take the time to learn about no-cost refinance methods before you apply.


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Two types of no-cost refinance

Technically, you can’t refinance with no closing costs. There are always fees associated. But you can avoid paying those costs upfront by either rolling them into your loan or having the lender pay your costs in exchange for a higher interest rate.

Both no-cost refinance methods can save you money upfront, but they have unique pros and cons. Here’s what you should know about each strategy.

1. Roll closing costs into your loan

This type of refinance removes the out-of-pocket expense by rolling your closing costs into your mortgage loan. Keep in mind, though, this option will increase your mortgage balance. So if your current balance is $200,000 and you owe $5,000 in closing costs, your mortgage balance increases to $205,000. As a result, you’ll have a slightly higher mortgage payment and pay more in interest over time.

Although this is one way to avoid paying closing costs out of pocket, it isn’t an option for everyone.

As a general rule of thumb, your mortgage balance can’t exceed the value of your property. Therefore, this no-cost refinance only works when borrowers have sufficient home equity.

2. Lender-paid closing costs in exchange for a higher rate

If you don’t have enough home equity, another option is a lender credit. In this scenario, your mortgage lender pays all or some of your closing costs. In exchange, you pay a slightly higher mortgage rate.

This may be a good solution if you don’t plan to keep your new mortgage all that long. However, paying a higher rate on your entire loan amount will likely cost you more in the long run than rolling closing costs into your loan balance.

Compare no-closing-cost refis

Here’s just one example to show how your long-term mortgage costs might change if you pay closing costs upfront, roll them into the loan balance, or use a lender credit:

Closing Costs Paid UpfrontClosing Costs Rolled Into LoanLender-Paid Closing Costs
Upfront Cost$9,000$0$0
Loan Amount $300,000$309,000$300,000
Interest Rate4.75%4.75%5.25%
Monthly P&I Payment $1,565$1,605$1,660
Interest Paid over 30 Years$263,390$270,160$296,390

All examples generated with The Mortgage Reports Mortgage Calculator. Interest rates are for sample purposes only. Your own interest rate will be different.

Typical refinance costs

Since refinancing replaces an existing mortgage, it probably comes as no surprise that you’ll need to complete a new mortgage application and go through the loan process again.

Whether you’re buying or refinancing, getting a mortgage isn’t without closing costs. These expenses typically include:

  • Loan origination fee
  • Title search fee
  • Credit report fee
  • Recording fee
  • Appraisal
  • Prepaid items (taxes and homeowners insurance)

Closing costs range between 2% and 5% of the loan amount. Some borrowers pay closing costs using their personal funds while others roll them into the loan balance or use a lender credit to cover their costs in exchange for a slightly higher rate.

Is a no-cost refinance a good idea?

In all honesty, it depends on a borrower’s circumstances and preference.

The benefit of a no-cost refinance is the ability to save money upfront. So it’s a good idea if you don’t have enough money in savings to cover your refinancing costs, or if you prefer not to touch your savings.

Keep in mind, though, that you’ll end up with a larger loan or a higher rate. So a no-cost refi only makes sense if the new rate and/or payment are still lower than your current one, generating worthwhile savings.

If you have enough in savings to pay your closing costs upfront — meaning you’re not draining your savings account on the new loan — consider skipping a no-cost refinance and paying this expense out-of-pocket. This results in the lowest monthly payment possible, and you’ll save money in interest over the long run.

Also, if you’re thinking about a lender credit, first consider your credit score. If you have good credit, paying a slightly higher rate might still result in favorable terms. But if you have fair or poor credit, a higher rate could greatly increase your monthly payment.

Which type of no-cost refinance is best?

You might accept a lender credit if you don’t have enough equity to roll closing costs into the loan. However, before getting a lender credit to avoid closing costs, consider how long you’ll keep the new mortgage. A higher rate typically makes sense only when you don’t plan to keep the loan long-term.

If you’re keeping the mortgage for the foreseeable future, it’s cheaper to pay the closing costs upfront (if possible). You’ll pay considerably less in interest over the long run.

Keep in mind, too, that rolling closing costs into the loan results in paying additional interest. Even so, this option can work if you have plenty of equity and you’re not concerned about a slightly higher monthly payment.

No-cost refinance FAQ

What is a zero-cost loan?

A zero-cost or no-cost refinance loan eliminates out-of-pocket expenses at closing. This doesn’t mean you don’t have closing costs. Rather, you don’t pay these costs upfront. Options include rolling closing costs into the loan balance or getting a lender credit in exchange for paying a higher rate. A lender credit involves the lender paying some or all of your closing costs.

Why are closing costs so high on a refinance?

Closing costs cover all the fees necessary to set up your new loan. This includes lender and third-party expenses such as the loan origination fee, appraisal, title search, credit report fee, prepaid items, and recording fee. These have to be paid when you refinance just like when you bought your home because most of the same steps are involved to originate the new mortgage.

How do I avoid refinance fees?

There isn’t a true no-cost refinance, but you can avoid paying refinance fees upfront. Discuss these options with your mortgage lender. If you have enough home equity, one option is rolling closing costs into your loan. This results in a higher loan balance. You can also accept a higher mortgage rate for your lender to pay all or some of your closing costs.

Does a cash-out refinance have closing costs?

A cash-out refinance involves replacing an old mortgage with a larger mortgage, and then getting the difference in cash. Similar to a rate-term refinance, a cash-out refinance has closing costs. These include the loan origination fee and the appraisal fee. Average closing costs range from two to five percent of the loan amount.

Should you roll closing costs into a refinance?

Paying your closing costs upfront is often cheaper than rolling the costs into the mortgage loan. You’ll pay less interest over the life of the loan. Even so, including these costs in your loan makes sense if you can’t pay upfront (and when you have enough home equity). You can’t get a mortgage for more than the value of your home.

Are refinance closing costs tax-deductible?

When refinancing a primary residence, most closing costs aren’t tax-deductible. That includes fees like a home inspection, recording fee, appraisal, and attorney fees. You can, however, deduct mortgage interest and real estate taxes paid at closing. (But only if you itemize your taxes instead of taking the standard deduction.) The rules differ for a rental home; you can deduct closing costs when refinancing an income-generating property.

Is refinancing a house worth it?

Refinancing can lower your mortgage rate and monthly payment and/or allow you to tap the equity in your home. Before refinancing, though, review your credit score and current mortgage rates. Ideally, your new mortgage rate should be lower. Also, consider how long you’ll keep the new loan. No-cost refinancing typically results in a higher mortgage balance and/or mortgage rate, so paying your closing costs upfront is often cheaper in the long run.

Check your no-cost refinance options

Mortgage and refinance rates have risen from their all-time lows. But refinancing is still worth it for many homeowners.

If you want to refinance but would rather avoid the upfront cost, talk to a lender about no-closing-cost refinance options.


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