A Guide To The No-Closing-Cost Refinance

Many homeowners underestimate exactly how much they need to pay in closing costs during a mortgage refinance. Are closing costs stopping you from getting a refinance? If so, a no-closing-cost refinance (refi for short) might be right for you.

This article will take a look at the true cost of a no-closing-cost refi, explain closing costs and fees, and then discuss why you'd want to choose a no-closing-cost refinance.

What Is A No-Closing-Cost Refinance?

A no-closing-cost refinance does not require you to pay closing costs when you get a new loan. But just because there are no upfront costs doesn’t mean that your mortgage lender foots the bill for free. No-closing-cost refinances don’t eliminate a borrower’s expenses – they only move them into your principal or exchange them for a higher interest rate. Even so, this still means that it’s possible to refinance without closing costs paid out of pocket.

How Do No-Closing-Cost Refinances Work?

The simplest no-closing-cost mortgage refinance takes the amount that you would have paid at closing and rolls it into your new mortgage. In other words, your lender adds the balance of your refinance closing costs to your principal, the unpaid balance of your loan. This increases your monthly payments but doesn’t affect your interest rate.

Your lender may also allow you to take a higher interest rate in exchange for waiving your closing costs. Your mortgage interest rate is the percentage of the principal that you pay as the cost for borrowing money. Refinance interest rates depend on many different factors. A higher interest rate doesn’t change your principal amount, but you’ll pay more each month in interest.

Average Closing Costs When Refinancing A Mortgage

Just like when you first bought your home, there are various lender costs to refinance a mortgage you’ll have to pay. In most cases, these closing costs and fees can end up being 3% – 6% of your loan amount. Some of the closing costs you may see when you refinance include:

Loan Origination Fee

You’ll pay an origination fee to your lender to prepare your loan. The average origination fee is 0.5% – 1% of the loan amount and covers the application fee, underwriting and other administrative costs. This is listed in the same origination charges section of your Loan Estimate as discount points.

Appraisal Fee

During a home appraisal, a professional comes to your property to assess its value. When you refinance, you’ll need to get an appraisal or other form of home valuation to ensure your property value hasn’t drastically changed since you bought the home. Lenders will use the appraisal to calculate your loan-to-value (LTV) ratio to help them determine the financial risk of your refinance.

Most appraisers charge $600 – $2,000 for their services. The cost can be higher depending on square footage, the number of units and the distance the appraiser has to travel, among other factors.

Title Fee

When you buy real estate, you receive a document called a deed. A deed shows that the seller transferred legal ownership, or the title, of the home to you. Title insurance protects you from errors in the ownership records of your home or property. Because the refinance is a new loan, you’ll need to pay for the title search and buy a new lender’s title insurance policy.

Luckily, most title insurance companies offer significant discounts for returning customers who already bought a policy when they first bought the home.

VA Funding Fee

If you’re refinancing a VA loan, you’ll need to pay a percentage of your new loan back to the Department of Veterans Affairs (VA). The amount you pay for the VA funding fee depends on the type of refinance being done, the amount of equity you’ll have after the refinance, how much of a down payment you make and whether it’s your first time using a VA loan.

If you’re refinancing from one VA loan to another – a VA Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline refinance – the funding fee is just 0.5% of the loan amount.

Some borrowers, including those receiving VA disability, are exempt from paying the VA funding fee. Additionally, surviving spouses receiving Dependency Indemnity Compensation (DIC) and Purple Heart recipients who are on active duty are exempt.

Mortgage Insurance

Federal Housing Administration (FHA) loans have an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount if you’re refinancing from another type of loan to an FHA loan or if you’re doing an FHA Streamline (from one FHA loan to another). In either case, these can be built into the loan balance.

Conventional loans have the option of a single-pay mortgage insurance. Typically,