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

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.

In this article (Skip to...)

• No-cost refi options
• Typical refinance costs
• Is a no-cost refi a good idea?
• Which no-cost refi is best?
• No-cost refinance FAQ

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:

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

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.