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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.
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.
When a lender offers a no-closing-cost refinance, they recoup those costs in one of two ways:
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.
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 mortgage||Traditional refinance||Closing cost rolled into loan amount||Closing cost rolled into the interest|
|Monthly savings||Not 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.
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:
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.
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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