No-Closing-Cost Refinance

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What You Should Know

  • No-closing-cost refinance allows a borrower to roll closing costs into mortgage payments instead of paying up front.
  • No-closing-cost refinance usually has a higher interest rate, so the borrower would have to pay more in monthly payments.
  • Not every lender allows this type of refinancing, so it is important to shop around when looking for no-closing cost refinancing.

What Is a No-Closing-Cost Refinance?

no closing cost refinance

A no-closing-cost refinance is a technique used to refinance a property when closing costs are not paid upfront but instead rolled into the monthly mortgage payments. Refinance closing costs may get expensive as a borrower usually pays 2% - 5% in closing costs from the loan value. This means that a borrower who refinances a loan of $500,000 has to pay upfront from $10,000 to $25,000 in closing costs. With a no-closing-cost refinance, the closing costs are rolled into the monthly payments. This allows the borrower to avoid paying hefty closing fees upfront and instead pay them off with the mortgage. On the other hand, if the borrower chooses to refinance with no-closing-cost, the fees are combined with the principal of the loan. The borrower will have to pay interest not only on the original loan value but also on the closing costs that are added to the principal.

Pros And Cons of No-Closing-Cost Refinance
No Upfront PaymentsHigher Interest Rate
Shorter Break-Even TimeHigher Loan Principal

How Does a No-Closing-Cost Refinance Work?

A borrower may ask a lender for a no-closing-cost refinance. If the lender agrees, the lender will add the closing costs to the original principal of the loan. In this case, the borrower will have to pay off the original principal plus the closing costs and any interest accrued during the lifetime of the loan. In addition to that, most of the time, the lender will set a slightly higher mortgage rate for the no-closing-cost refinance even if the borrower has an excellent credit score. Given these considerations, the borrower will not have to pay any upfront fees, but they will face higher monthly payments for the mortgage.

Refinancing With Closing Costs and Without Closing Costs
ItemRefinance With Closing CostsNo-Closing-Cost Refinance
Upfront Payment$15,000$0
Interest Rate2%2.5%
Monthly Payment$3,217.54$3,433.96
Total Cost of Refinancing$594,157.83$618,133.59

As an example, suppose a borrower wants to refinance a $500,000 loan outstanding. They could refinance it at 2% interest rate for 15 years and pay $15,000 in closing costs. In this case, the borrower would have to pay $3,217.54 in monthly payments, and pay $594,157.83 in total including the closing costs. On the other hand, a lender offers the borrower to take advantage of no-closing-cost refinance with the same terms and interest rate of 2.5%. In this case, the borrower does not have to pay any closing costs upfront, but their monthly payments would be equal to $3,433.96. With no-closing-cost refinancing, the borrower would pay $618,113.59 in total to cover the mortgage. In total, the borrower would have to pay $23,955.76 more for no-closing-cost refinance. A borrower who is considering getting no-closing-cost refinancing should calculate mortgage amortization in both cases to see what fits them the most.

Pros And Cons of No-Closing-Cost Refinance

Just as with any type of loan, no-closing-cost refinancing has its own advantages and drawbacks. Even though paying no closing costs may sound appealing, it is important to understand the cost that comes with this type of refinancing.

  • No Upfront Closing Costs

    The main advantage of no-closing-cost refinancing is the fact that the borrower does not have to look for money to close the deal. This might be beneficial to borrowers who would like to take advantage of a lower interest rate but do not have the ability to pay for closing costs at the moment.

  • Shorter Break-Even Time

    If a borrower is trying to refinance the mortgage, and their goal is to break even as fast as possible, then the no-closing-cost refinancing may be a great opportunity for them. Because there are no upfront costs related to this type of refinancing, the breakeven point will come much faster.

  • Higher Interest Rate

    The lender will likely require a higher interest rate on the loan if the borrower chooses to go with no-closing-cost refinancing. Because of that, the borrower will have to pay more in interest payment on the whole principal of the loan.

  • Higher Loan Principal

    No-closing-cost refinancing implies that the borrower does not have to pay the closing costs upfront. Instead, the closing costs will be added to the principal that will have to be repaid over the lifetime of the mortgage. With higher principal, the borrower will have to pay more in interest and monthly payments.

Is No-Closing-Cost Refinancing Worth It?

In short, the main advantages and disadvantages of no-closing-cost refinancing are no upfront payments and higher monthly payments respectively. A borrower should decide on their own whether no-closing-cost refinancing is beneficial for them. Their decision might depend on the factors such as debt-to-income ratio, amount of cash currently available, the urgency to refinance, and financial objectives for refinancing.

If a borrower wants to refinance their loan as soon as possible but does not have enough funds to close the deal, they may prefer no-closing-cost refinancing. Additionally, they may prefer no-closing-cost refinancing if they would like to break even faster. A borrower may want to break even faster if they are planning to sell their property in a few years. In this case, if the borrower chooses to refinance and pay closing costs, then it is likely that the upfront closing costs will outweigh the benefit of refinancing. On the other hand, if the borrower chooses to refinance without paying closing costs, then they do not have to wait until the benefit of refinancing will outweigh the cost of closing upfront.

If a borrower does have the money to refinance and keep the property for many years, then it might make sense to refinance and pay closing costs upfront to receive the benefit of lower interest rates and monthly payments. It is important to consider the opportunity cost of paying closing costs upfront. If the borrower has an opportunity to invest that money to get a higher return, then it might make more sense to avoid paying upfront costs and earn interest from those funds instead.

Lastly, not every lender allows no-closing-cost refinancing. A borrower must ensure that the lender allows such a practice before considering no-closing-cost refinancing. If the borrower wants to take the opportunity of the program, but their lender does not allow that, it might be beneficial to shop around and see what rates and programs other lenders offer.

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