No-closing-cost refinance: What borrowers should know

Important Legal Disclosure:

Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/rates, where current pricing and various loan terms are made available.

When you refinance your mortgage, you pay closing costs in the range of 3% – 6% of your loan amount. If paying those fees up front feels overwhelming, a no-closing-cost refinance could give you some breathing room. To help you decide if this option makes sense, let’s break down what a no-closing-cost refinance is, the pros and cons, and what the typical cost of refinancing mortgage loans looks like.

What is a no-closing-cost refinance?

A no-closing-cost refinance lets you avoid paying closing costs up front, but the costs do not disappear.

Instead of paying them in cash up front, you either roll your closing costs into your loan amount or accept a higher interest rate from your lender. You're still paying closing costs, just not up front.

This can take off some of the pressure by removing the need to pay closing costs up front. The trade-off is that you'll pay more interest over the life of the loan.

How do no-closing-cost refinances work?

With a basic no-closing-cost refinance, the lender folds your closing costs into your new mortgage balance. Since you are borrowing more, your monthly mortgage payment will increase, and you'll pay more interest.

As an alternative, some lenders will pay your closing costs for you in exchange for charging you a higher interest rate. In this case, your principal will not change, but your mortgage rate will be higher, and you'll pay more interest.

What are the average closing costs when refinancing a mortgage?

Since refinancing involves taking out a new mortgage, you'll pay the same fees as when you applied for a loan to buy your home. The cost to refinance a mortgage includes lender fees and closing costs.

Expect your closing costs to total 3% – 6% of your loan amount. Your lender will disclose your closing costs on your Loan Estimate and Closing Disclosure.

Here are some common closing costs associated with refinancing your mortgage.

Loan origination fee

An origination fee is what your lender charges to prepare and process your loan. It often includes costs such as an application fee, an underwriting fee, and administrative fees. It usually totals about 0.5% – 1% of your loan amount and appears in the same section of your Loan Estimate as discount points.

Appraisal fee

The appraisal fee is paid to a third-party professional who determines your home's current market value. Your lender uses the appraisal to calculate your loan-to-value (LTV) ratio, which helps them determine the financial risk of approving your mortgage refinance. The more home equity you have, the less risky the loan is for the lender.

Appraisals usually cost between $600 and $2,000. However, the price can be higher for larger homes or more complex properties.

Title fee

A title fee pays for a property title search and a new lender’s title insurance policy, which are required any time you take out a new home loan. When you buy a home, you receive a deed that shows the title was officially transferred to you. Title insurance helps protect you if there are mistakes in the ownership records.

Since a refinance is a new loan, the lender must recheck the title, and you will need to purchase a new lender's title insurance policy. Keep in mind that many homeowners get a discount if they already bought title insurance when they first purchased the home.

VA funding fee

If you refinance with a VA loan, you will pay a VA funding fee to the Department of Veterans Affairs.¹ This fee supports the VA loan program and is usually between 0.5% for a VA Streamline² refinance and 3.3%. The exact amount you pay depends on:

• The type of refinance
• How much equity you have
• How much down payment you make
• Whether it is your first time using a VA loan

Mortgage insurance

FHA refinances require an up-front mortgage insurance premium (MIP) of 1.75% of the loan amount. This applies whether you are refinancing from another type of loan into an FHA loan or doing an FHA Streamline refinance³. This fee can be added to your loan balance.

Conventional loan refinances work a little differently. Lenders require you to pay for private mortgage insurance (PMI) when you have less than 20% equity in your home. PMI is paid every month and continues until you have at least 20% equity.

Credit report fee

When you refinance, the lender will pull your credit report to make sure your credit score has not gone down since you first took out your mortgage. They also check for other financial issues, like unpaid student loans or credit card debt. The fee for this report usually ranges from $10 to $100.

Mortgage points

When taking out a home loan, mortgage points, also called discount points, let you pay some interest up front to get a lower rate.

Each point costs about 1% of your loan amount and typically reduces your interest rate by 0.25%. You usually can buy fractions of a point. Whether it is worth buying points usually depends on your monthly savings and how long you expect to stay in the home.

For example, buying 2 points on a $300,000 loan costs about $6,000 and might save you $75 a month. That means it takes about 80 months to make back your money. But with a no-closing-cost refinance, adding points usually makes the loan more expensive overall, which goes against the whole point of using a no-closing-cost refinance in the first place.

What are the types of no-closing-cost refinance?

There are two main ways a no-closing-cost refinance can work. Your lender may either raise your interest rate or add the closing costs to your loan balance.

• Higher mortgage interest rate: You pay a slightly higher rate in exchange for skipping the up-front fees.
• Higher loan balance: Your lender adds closing costs to your loan amount.

Remember that not every lender offers both options, so make sure to check which options your lender provides.

Increased mortgage rates

This option works like this: your lender pays your closing costs up front, and in exchange, you agree to pay a higher mortgage interest rate. Your loan amount stays the same, but you will pay more interest over time to compensate the lender for the closing costs.

This type of refinance can be helpful if you want to avoid paying money at closing. However, it does mean your monthly payment and long-term interest costs will be higher.

Example: Refinancing with an increased mortgage rate

Let’s say you want to refinance a $150,000 loan into a 15-year mortgage. If you pay the 4% closing costs yourself, which is about $6,000, your lender may offer a lower interest rate of 5.375%. At this rate, your monthly payment would be about $1,216.

If you choose not to pay the $6,000 up front, your lender may raise your interest rate to something like 5.875%. With this higher rate, your monthly payment would be about $1,256. That means you would pay around $40 more each month.

You save money up front, but you pay more over time because of the higher rate.

Higher loan balance

If you choose to roll your closing costs into your home loan, you are effectively borrowing more money. So, if you start with a $150,000 loan and add $6,000 in closing costs, your new loan amount becomes $156,000.

Example: Refinancing with a higher loan balance

Using the same rate as above (5.375% on a 15-year loan), a $150,000 balance would give you a payment of about $1,216. If your balance increases to $156,000 with closing costs added, the payment rises to about $1,264, which is roughly $48 more per month.

Because you are borrowing more, you will also pay about $2,753 more in interest over the life of the loan than you would on the $150,000 loan.

Pros and cons of no-closing-cost refinancing

When it comes to choosing a mortgage refi, there really isn't a one-size-fits-all solution, since every borrower has a different budget and needs. That is why it is always helpful to weigh both the pros and cons, so you can pick an option that is right for your goals.

Pros of no-closing-cost refinancing

• You can keep more cash in your pocket right now, which may help you afford home repairs or updates, or give your budget some breathing room.
• The refinancing process may feel more manageable since you can skip the big up-front payment of closing costs.
• You may still qualify for a competitive interest rate, since some lenders offer competitive rates even with a no-closing-cost option.

Cons of no-closing-cost refinancing

• Your new interest rate may be higher, which could mean you pay more over the life of the loan, even though you do not have to pay anything up front.
• Your loan balance could be bigger when you roll closing costs into the amount you owe, which in turn raises your monthly payment.
• Saving money today may mean paying more later, so you want to be sure the trade-off makes sense for your plans.

FAQ

To help you make sense of no-closing-cost refinancing, here are answers to the questions homeowners usually ask.

What are the benefits of a no-cost refinance?

A no-closing-cost refinance gives you the option to refinance without a big up-front payment. This can be a relief if you are short on savings or need your cash for something else right now. Even with a slight rate increase, refinance rates tend to be lower than other borrowing options, so the long-term costs may still be lower overall.

When does a home refinance with no closing costs make sense?

No-closing-cost refinancing makes the most sense when you know you will be in your home for a shorter period, such as 5 years or less. This option lets you move forward with a refi without paying thousands of dollars in closing costs up front. In this case, you may sell or refinance again before the added interest becomes burdensome.

When would a refinance without closing costs not work?

For homeowners planning to stay put, lumping closing costs into the loan can become more expensive in the long term than just paying them up front.

The bottom line: A no-closing-cost refinance is a great option

A no-closing-cost refinance can help you lower your interest rate or monthly payment, especially if today's interest rates are lower than your current rate and you expect to move or refinance again soon. But if this is your forever home, rolling in those costs may mean paying more in interest over the term of your loan. Remember that what works best for you will ultimately depend on your personal finances and your plans, so make sure to weigh all your options.

If you’re considering refinancing, consider exploring your borrowing options with Rocket Mortgage today.

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

²The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

³The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.