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No-closing-cost refinance: Does it make sense?

There may be no upfront fees, but it will still cost you.

When you qualify for a no-closing-cost refinance, you still pay closing costs — just not in cash up front. The costs end up being rolled into your interest rate or loan amount and get paid over time.

This type of refinance may make sense for borrowers who can’t afford paying upfront closing costs, intend to stay in their homes short term or anticipate refinancing again.

What is a no-closing-cost refinance?

A no-closing-cost refinance is a new mortgage that replaces your current one with $0 upfront fees due at closing. But that doesn’t mean the refinance is free.

A traditional refinance comes with closing costs that can run you about 2% to 5% of the principal loan amount, and varies by state and lender. These upfront fees cover lender charges and third-party expenses such as an appraisal or title search fee. Closing costs are due when you officially secure a mortgage and close on the loan.

With a no-closing-cost refinance, lenders find other ways to recoup their closing costs through rate hikes and rolling fees into the loan amount.

How a no-closing-cost refinance works

When a lender offers a no-closing-cost refinance, they recoup those costs in one of two ways:

  • By charging a higher interest rate. Lenders can offset the cost of a no-closing-cost refinance by raising your interest rate. If you plan to stay in your home long-term, a higher interest rate could end up costing you more over the long run.
  • By rolling the fees into the loan. Some lenders may choose to bundle the closing costs into the loan balance. So while you may not pay anything up front, you’ll end up paying interest on the closing costs — costing you more in the long run.

When a no-closing-cost refinance makes sense

A no-closing-cost refinance could be a good option if you plan to sell your home in the next few years, or if you may refinance again. Although you may end up paying more interest each month, it likely won’t exceed the thousands of dollars you would’ve spent in closing costs.

It may also be an option for homeowners who want to refinance, but don’t have the cash to pay for closing costs. It could also make sense to some to use that money for a large upcoming expense or to pay down higher-interest debt.

When a no-closing-cost refinance may not be a good idea

If you plan to stay in your home long-term and have the cash, you’ll save money in interest and monthly payments by paying the fees up front.

Here’s what you might save in total interest payments on a few different refinance options.

Original mortgageTraditional refinanceClosing cost rolled into loan amountClosing cost rolled into the interest
Loan amount$200,000$200,000$204,000$200,000
Interest rate5.00%4.25%4.25%4.75%
Monthly payment$1,070$980$1,000$1,040
Monthly savingsNot applicable$90$70$40
Interest savings (over the life of the loan)Not applicable$32,310$29,230$10,930
Total savings (after closing costs)Not applicable$28,310$25,230$10,930

If your lender recoups the closing costs with a higher interest rate or a larger loan amount, it’s likely your monthly payments will be higher and you’ll end up paying more in interest than if you paid the fees up front. But crunch the numbers to find the best deal for your refinance.

How to calculate your break-even point

The break-even point is how long it takes to save after refinancing. A no-closing-cost refinance may be a good option if you plan on moving or refinancing within a few years. Here’s how to calculate your break-even point:

  1. Get a refinance loan estimate including interest rate, terms, loan amount and closing costs.
  2. Calculate the difference between your current monthly payment and your new payment.
  3. Determine your break-even point by dividing your closing costs by your monthly savings.

For example, if your refinancing closing costs total $4,000 and your monthly savings were $65, your break-even point could be about five years.

Bottom line

A no-closing-cost refinance can be a good option for homeowners who plan to stay in their home short term or intend to refinance before the break-even point. And since only some lenders offer no-closing-cost refinances, shop around to compare offers. Do the math to make sure this type of refinance makes sense for your financial and homeownership goals.

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