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

When you qualify for a no-closing-cost refinance, you still pay closing costs — only not in cash up front. The costs end are 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 temporarily stay in their homes 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 zero upfront fees due at closing. Instead of paying the 2% to 5% for closing costs in advance when you receive the loan as you would with a traditional refinance, these costs are either rolled into the loan amount or are repaid through a higher interest rate.

So while you won’t have to pay closing costs straight up, you aren’t off the hook from paying them entirely. And how the lender chooses to recoup these costs can have a different outcome on your mortgage. Here’s how each option can affect your mortgage.

• The lender charges a higher interest rate. The lender 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.
• The lender rolls 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 in addition to the interest you’re paying on the loan — costing you more in the long run.

How closing costs work

3 situations when a no-closing-cost refinance makes sense

A no-closing-cost refinance could be a good option in the following situations:

1. You plan to sell your home or refinance again in the next few years. 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.
2. You want to refinance but don’t have the cash to pay for closing costs. Your credit profile may have improved since taking out your original mortgage and you want to refinance, but you don’t have enough cash available to cover the closing costs.
3. You have more pressing reasons to use that cash. It makes more sense to use the money you otherwise would have spent on closing costs for a large upcoming expense or to pay down higher-interest debt.

1 main reason 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 in advance.

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

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.

Finding a lender that offers no-closing-cost refinancing can be tough

Every lender offers different mortgage options, but the no-closing-cost refinancing option is pretty elusive. Even if a lender doesn’t advertise a no-closing-cost refinance, it might be worth calling and asking if it’s an option. They might be willing to work with you.

U.S. Bank offers a no-closing-cost refinance option they call a U.S. Bank Smart Refinance. It’s available with fixed rates and 5-, 10-, 15- and 20-year terms and can be used as a cash-out refinance option. There are no out-of-pocket costs, but its interest rates are higher compared to its traditional refinance and cash-out refinance options.

For example, U.S. Bank’s regular cash-out refinance option offers rates as low as 4.625% as of March 2022 for a conventional 20-year term. However, U.S. Bank’s Smart Refinance option offers rates as low as 4.19% for the same 20-year term.

Compare refinancing options

If you’re considering refinancing, compare your options to see if you could save more with a better interest rate — even if it means rolling in closing costs.

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Name	Product	Loan products offered	State availability	Min. credit score	‎
Rocket Mortgage (NMLS #3030)		Conventional, Jumbo, FHA, VA, Refinance	Available in all states	620	See rates (888) 329-4989	Apply online for free and lock in your rate for 90 days.		loading Fetching your data...
Veterans United (NMLS #1907)		Conventional, FHA, VA, USDA, Jumbo, Refinance	Available in all states	620	See rates More Info	Veterans United stands out from other lenders for its focus on serving the military community.		loading Fetching your data...

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3 steps 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 a short-term stay in their home 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.

Frequently asked questions

What are the other ways to avoid closing costs?
Try reducing your closing costs without a no-closing-cost refinance by negotiating with your lender. Some lenders are willing to waive specific fees.

What if I refinance to a longer loan term?
Although a longer loan term may lower your monthly payment, you’ll pay more interest over the course of the loan. Make sure a longer loan term aligns with your refinancing goals.