How to Determine If a No Closing Cost Refinance Is Right for You


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A home mortgage refinance doesn’t come cheaply, as homebuyers typically must pay thousands of dollars in closing costs and fees to finalize a loan. These expenses can seem endless as you get bills for everything from attorney fees to an appraisal to a loan origination fee. Closing costs vary by lender, loan amount and location, but in the end, they’re usually up to 3 percent of the home’s purchase price. For a $200,000 loan, that means closing costs of roughly $6,000.
For many homebuyers, these upfront costs put refinancing out of reach.
What is a no closing cost refinance?
A no closing cost refinance means that you refinance your home mortgage without paying thousands of dollars in upfront closing costs and fees to close the loan. But that “no” in the name can be confusing, because you’re not really avoiding that expense. While this process can save homebuyers money upfront, lenders work in closing costs elsewhere either by slightly raising interest rates or adding the closing costs to the balance of the loan.
How do I get one?
You can refinance your mortgage with no closing costs at banks, credit unions or other lenders. Standard qualifications for refinancing will apply, including a property value that exceeds the amount of the refinance and a credit score that is greater than lender minimums (usually more than 620). Lenders also typically expect your refinance payment and other debt payments to total less than 43 percent of your gross income.


Savings analysis: No closing cost refinance vs. regular refinance


No closing cost refinance doesn’t always result in savings. Homeowners who have a good idea how long they will stay in the house will be in the best position to decide whether refinancing without closing costs is a good idea.
Here is a comparison between a standard refinance and a no closing cost refinance where the lender slightly raises the interest rate to compensate for the lost closing costs. Loan officers will raise your interest rate based on daily market rates.





Regular refinance No closing cost refinance




Mortgage balance $200,000 $200,000


Closing costs $4,800 None at loan closing


Refinance interest rate 3.5% 4.1%


Term 30 years 30 years


Monthly payment $898 $966


Total cost of mortgage* $323,312 $347,903





In this example, a homeowner who stays in his home for at least 30 years will save $68 per monthly payment and more than $24,500 over the life of the loan with a lower interest rate. The additional interest that comes with the no closing cost refinance loan far exceeds the $4,800 of closing costs with a regular refinance.
Another common way lenders will refinance a mortgage with no closing costs is to roll the costs into the balance of the loan. Here’s the same mortgage using this option.





Regular refinance No closing cost refinance




Mortgage balance $200,000 $204,800


Closing costs $4,800 None at loan closing


Refinance interest rate 3.5% 3.5%


Term 30 years 30 years


Monthly payment $898 $920


Total cost of mortgage* $323,312 $331,072





The no closing cost refinance costs an extra $22 per month. If you stay in your home for the duration of the loan, the no closing cost refinance would add an additional $2,960 to your mortgage expenses (after accounting for the $4,800 you’d pay upfront for the regular refinance).
For homeowners who only plan to stay in their homes five years or fewer, however, refinancing with no closing costs could help them break even or come out ahead on closing costs. Here’s a breakdown.





Regular refinance No closing cost refinance




Mortgage balance $200,000 $200,000


Closing costs $4,800 None at loan closing


Refinance interest rate 3.5% 4.1%


Terms 30 years 30 years


Remaining balance after five years $179,394.15 $181,185.57





With a no closing cost refinance, you would pay about $1,790 more on a $200,000 mortgage if you got a regular refinance; however, you would have paid the $4,800 in closing costs upfront, meaning you’d save money in the long run with a no closing cost refinance (assuming you sell the house after five years).
Is a no closing cost refinance a good idea?
The upside
The biggest advantage of a no closing cost refinance is you do not have to come up with several thousand dollars in cash to close on your refinanced mortgage. Closing costs can add up quickly as you factor in an appraisal, loan origination fee, and other charges, and many buyers simply can’t afford them. A no-cost refinance doesn’t eliminate those costs, but it does spread them out into monthly payments, allowing you to pay for them over time.
The downside
Over the life of a loan, a refinance with no upfront closing costs can add up to a significantly more expensive choice than a traditional refinance. You can use a refinance calculator to help you figure out whether a no-cost refinance is worth it.
Is a no closing cost refinance right for you?
As you are thinking through whether a refinance with no closing costs is right for you, here are some questions to consider.
Will you qualify to refinance your mortgage?
Before applying, make sure your credit score is high enough to be approved for a refinance loan. You’ll also need to have sufficient equity in your home and a debt-to-income ratio of less than 43 percent, in most cases.
Will refinancing lower your monthly payment?
If your goal is to get a lower monthly mortgage payment through refinancing, a traditional refinance will likely be your best bet. A no closing cost refinance could also lower your monthly payment, though. Don’t forget to calculate in either the higher balance or higher interest rate you’ll have after the lender factors in closing costs. Before you agree to the refinance terms, be sure they will lower your monthly payment enough to be worthwhile.
How long do you plan to stay in your house?
If you are planning on selling your house in less than five years, a refinance with no closing costs almost always will save you money. You may have a higher monthly payment than a regular refinance, but if you get out of the mortgage after a few years, you likely will have spent less than if you had taken out a traditional refinance and paid closing costs.
If you plan to stay in your house indefinitely or longer than several years, a no closing cost refinance may be much more costly in the long run.


How to shop for mortgage refinance loans


To compare no closing cost refinance offers, visit financial institutions and talk with loan officers. They will look at current interest rates and your financial information to help you determine whether refinancing with no closing costs will work for you.
One advantage of no closing cost refinances is that they eliminate the closing costs and fees that can make loan-offer comparisons complicated. With quotes for no closing cost refinance mortgages in hand, you can easily compare interest rates . This allows mortgage shoppers to more effectively shop around and find the best deal.
What to look out for
As you should before agreeing to any loan terms, make sure you understand all costs involved. While a lender may not be charging closing costs when the loan is signed, there may be other fees and expenses that aren’t waived. Ask about fees and what they include. These could be:

Government transfer taxes
Homeowners insurance
Escrow funds

Some no closing cost refinance loans come with prepayment penalties to steer borrowers away from refinancing the loan quickly for a lower interest rate. Check the rules of the loan to make sure there are no prepayment penalties.
Where to shop for no closing cost loans
Traditional lenders, such as banks and credit unions, as well as other private lenders, may offer a refinance mortgage with no closing costs. You can compare current refinance rates with the online comparison tool by LendingTree, our parent company, but you’ll need to talk to a mortgage loan officer to determine what your refinance with no closing costs would look like.
If you have kept up with your mortgage payments but have little or no equity in your home to qualify for refinancing your mortgage, the federal Home Affordable Refinance Program (HARP) can help. If you qualify , you could refinance with a low interest rate and favorable terms. HARP also does not require a minimum credit score and will roll closing costs into the new loan.
Beware of closing cost scams
While refinancing your mortgage, you may receive emails that appear to be from your lender asking you to wire them closing costs. Do not respond, the Federal Trade Commission (FTC) warns , as this is a phishing scam trying to get your personal information and empty your bank account. This scam begins when hackers break into homebuyers’ or real estate professionals’ email accounts and steal information about real estate transactions they are working on.
You should never send financial information by email, the FTC warns.
How to save on closing costs
If you’re worried upfront closing costs will make refinancing your mortgage too expensive, shop around. Closing costs can vary widely by lender and location, and remember that they’re negotiable. The more options you research, the better you will be able to choose the deal that allows you to pay the least for closing costs.

The post How to Determine If a No Closing Cost Refinance Is Right for You appeared first on MagnifyMoney .

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