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Refinancing a mortgage loan often reduces your interest rate. This can save you money over time. But there are up-front fees to pay. Some refinance lenders aim to entice borrowers with a no-closing-cost refinance. It's important to understand how this works as ultimately, you still pay closing costs. And sometimes, it will cost you more money.
What is a no-closing-cost refinance?
A no-closing-cost refinance is a mortgage refinance loan without up-front fees.
There are generally closing costs involved in refinancing. They can include a mortgage application fee, title insurance, underwriting fees, origination fee, and appraisal expenses. These can total thousands of dollars.
With a no-closing-cost refinance loan, you don't pay fees up front. This makes refinancing easier. But, ultimately, you do pay the fees for refinancing.
Some lenders charge a higher interest rate for a no-closing-cost mortgage to make up for the fees you didn't pay up front. Others add the fees and increase your loan amount. For example, a $350,000 mortgage refinance loan with $7,000 in closing costs becomes a $357,000 mortgage with closing costs added in.
How much are refinance fees?
Freddie Mac puts the average refinance fees at $5,000. However, the amount you borrow, your lender, and your location all determine your fees. Typically, refinance fees cost anywhere from 2% to 5% of the value of your loan.
Are there really no closing costs or fees involved in a no-closing-cost refinance?
There's no such thing as a true "no-closing cost" mortgage. You'll always have to pay costs to secure a new home loan. And lenders always pass those on to borrowers. However, the big difference is that you'll pay fees from a no-closing-cost loan over time. If you take out a standard loan you'll pay an upfront fee.
Will a no-closing-cost refinance cost me more in the long run?
In some cases, a no-closing-cost refinance can cost more over time. This happens when lenders either add closing fees to your loan balance or increase your interest rate to make up for unreimbursed expenses.
However, how much you pay in fees depends on two main factors: how long you keep your loan, and how lenders change your loan terms to account for the fees.
Let's say you qualify for a 30-year mortgage at 3%. The closing costs on your $350,000 loan would be $7,000.
Here's what happens when those fees are added to your loan:
- Your fees are added: Your loan balance goes from $350,000 to $357,000
- You are now paying fees in your monthly payment: Your monthly mortgage payment goes up by $29. (Calculated using our mortgage calculator.)
- You pay interest on those fees: Your total loan repayment costs rise from $531,221 to $541,846.
- In this example, you'll pay $10,625 more over the life of your loan to avoid the $7,000 upfront fee.
However, if you move or refinance again before your loan is fully paid off, you could pay less.
In this case, you'd increase your monthly mortgage payment by $29 per month if you roll in the closing costs. You'd need to make more than 240 monthly payments before the added $29 monthly cost adds up to the $7,000 you would have paid up front. If you plan to move before those 240 months are up, you might save money on your fees with this method.
How a no-closing-cost refinance works
When you take out a no-closing-cost refinance loan, you don't pay the customary mortgage refinance fees up front. This makes refinancing more affordable for homeowners as these fees ordinarily cost several thousand dollars. If you want to take advantage of today's low refinance rates, but aren't sure you can afford the fees, a no-cost refinance might make it feasible.
But even if you don't pay upfront closing costs, the lender still needs to recover that money spent on appraisal and loan origination. That's why mortgage lenders will either raise your interest rate or increase the size of your loan for this type of refinance.
This means that a no-closing-cost refinance doesn't truly mean you pay no closing costs. You simply pay them over time, rather than all at once. If you move or refinance again before your loan term is up, it's possible this approach will be cheaper in the long-run. Otherwise, it may cost you more.
RELATED: Need to start saving for a down payment? Check out The Ascent's guide to the best savings accounts.
Still have questions?
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The Ascent's best mortgage refinance lenders
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
FAQs
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A no-closing-cost refinance is a mortgage refinance loan you can get without paying up-front traditional closing costs. Instead, the lender recoups its refinancing costs over time by raising your interest rate or loan amount.
No-closing-cost loans make it possible to refinance even if you can't come up with large amounts of cash up front. Still, this results in a slightly higher monthly payment.
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There are still costs associated with a no-closing-cost refinance. Mortgage loan providers incur a cost to lend, and these are passed on to consumers. The costs are simply paid over time with a no-closing-cost loan. With a traditional loan, they are paid when you close on your refinance.
With a no-closing cost mortgage, you'll pay fees in the form of higher monthly mortgage payments. Payments will rise either because your lender ups your interest rate or adds the costs to your loan balance.
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The length of time you keep your loan determines whether a no-closing-cost mortgage will cost more. If refinance closing costs are rolled into your mortgage or your interest rate is increased to cover closing costs, you'll face higher monthly payments. However, the increase will be a small one.
If $7,000 in closings are added to a 30-year $350,000 loan at 3%, you'd end up borrowing $357,000. Monthly payments would increase by $29 monthly compared with a $350,000 loan. Extra monthly payments wouldn't add up to the $7,000 paid up front until you made more than 241 payments. If you move or refinance sooner, you won't pay more. But if you keep your loan for the entire 30-year term, you'd pay $3,625 in extra interest.
Our Mortgages Expert
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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