How to refinance your mortgage without closing costs

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A no-closing-cost refinance allows you to take advantage of refinancing without paying cash by rolling the closing costs into the loan itself. (iStock)

Refinancing your mortgage can come with several benefits. You might be able to save on interest, receive more favorable loan terms, and consolidate debt, among other things. While working through the refinancing process, however, some borrowers fail to take into account total loan costs, including the cash needed for closing.

Whenever you refinance your mortgage, you’ll have to pay closing costs. If you don’t have enough cash to pay for them up front, you can use what’s called a no-closing-cost refinance.

Credible makes it easy to research your mortgage refinance options and compare rates from multiple lenders.

What is a no-closing-cost refinance?

A no-closing-cost refinance allows you to refinance your mortgage without paying closing costs up front. Rather than pay cash at closing, you’ll see these costs rolled into the mortgage itself, and you’ll pay them each month as a part of your mortgage payment.

A no-closing-cost refinance works much like any other type of refinance:

First, you’ll shop around for refinance rates with multiple lenders. Make sure to ask each lender if it offers a no-closing-cost option.
You’ll then select the most competitive offer and start the underwriting process.
Once the loan is approved, you’ll schedule the closing date.
At closing, you won’t pay any cash to the lender because in a no-closing-cost mortgage, these costs get rolled into the loan.
Your new refinance loan will pay off your original mortgage and you’ll make your payments to your new loan servicer going forward. Since the closing costs are a part of your new loan balance, your monthly payments will be a little higher than if you had opted for a traditional refinance.

REFINANCING REQUIREMENTS FOR A MORTGAGE: WHAT TO KNOW

No-closing-cost refinance example

Say your refinance loan balance is $340,000 and closing costs will be 1% ($3,400). If you decide to pay your closing costs in cash, your monthly mortgage payment at a 5% interest rate would be approximately $1,825 each month — that comes out to $317,070 in total interest over a 30-year loan.

Now say you roll that $3,400 into your loan. That would bring your new balance to $343,400, resulting in a slightly higher monthly payment and more interest paid over the life of the loan. Assuming you secure the same 5% interest rate, you’d pay $1,843 each month. That extra $18 dollars a month adds up to $6,480 in extra payments over 30 years, which means you’ll pay nearly double for the closing costs than what you would’ve paid up front.

Costs to consider when refinancing a mortgage

The average mortgage refinance in 2021 cost $2,375, according to data from CoreLogic’s ClosingCorp, but total refinance costs vary by the size of home, amount of the loan, location, and more. You can generally expect to pay between 2% and 5% of the loan amount on closing costs.

Some of the fees commonly found at closing include:

Lender fees — Lender fees include a loan origination fee, title insurance fee, credit report fee, and prepaid interest charges. These costs all vary by lender.
Appraisal fees — Even if you purchased your home recently, you’ll still have to get it appraised again. An appraisal helps your lender determine the home’s current value. A home appraisal can run you a few hundred dollars depending on the size of the home and the location.
Recording fees — It costs the lender money to record the new loan with your county and state. Costs vary by location.

Remember that all fees are negotiable, so keep an open line of communication with your lender. Rather than opt for a no-closing-cost mortgage, you may be able to maximize your savings by asking your lender to waive certain fees. Your lender may not agree to waive any costs, but it’s always worth asking.

You can compare mortgage refinance rates from multiple lenders using Credible without affecting your credit.

Should you choose a no-closing-cost refinance?

Don’t be swayed by the flashy marketing of a no-closing-cost refinance — there’s no such thing as a mortgage without closing costs. While this option for closing costs is popular, you should sit down and run the numbers to see if it makes real financial sense for you and your family.

When a no-closing-cost refinance may make sense

Rolling closing costs into the loan makes the most sense if you aren’t planning to stay in your home long-term, or are refinancing a year or two out from your initial home purchase and are just beginning to rebuild your cash reserves.

It may also make sense to keep more money in savings if you anticipate any changes to your income in the near future.

WHEN IS THE RIGHT TIME TO REFINANCE MY MORTGAGE?

When a no-closing-cost refinance may not make sense

If closing costs are particularly high, it may take you a long time to recoup those costs. For example, if your closing costs are $4,000 and you save $200 each month, it’ll take you close to two years before you start to recoup the costs.

It also may not make sense to do a no-closing-cost refinance when interest rates are high. By rolling the costs into your loan, you’ll have a higher loan balance — and pay more in interest as a result.

Benefits of a no-closing-cost refinance

Refinancing a mortgage has many pros and cons. In particular, no-closing-cost refinances enable you to obtain more favorable financing terms while keeping cash in your pocket. You can use this money for other reasons, including:

Keeping cash available for emergency expenses

In light of the COVID-19 pandemic, market volatility, and inflation, it’s understandable if you want to tuck away more money into your emergency fund.

More money for a future down payment

More money in cash means more capital for a larger down payment on your next home. This can help a lot, particularly if you’re keen to upgrade to a more expensive home or nicer location in the near future.

Drawbacks of a no-closing-cost refinance

A no-closing-cost refinance isn’t the right move for everybody. Keep these drawbacks in mind if you’re thinking about one:

More expensive over time

A no-closing-cost refinance might sound enticing, but you’ll often pay for the transactional ease via a higher interest rate or higher monthly payment. As such, you’ll end up paying more for the loan over 15 or 30 years than if you’d paid for the closing costs up front.

HOW OFTEN CAN YOU REFINANCE YOUR HOME?

May come with hidden fees

In exchange for covering your closing costs up front, some lenders may charge an additional fee for this service. You might miss this fee because it’s hidden inside the other costs of your mortgage. This is why it’s important to read your Loan Estimate and Closing Disclosure to ensure you know exactly what fees are rolled up into your closing costs.

You know that saying, "There’s no such thing as a free lunch?" Well, think of no-closing-cost refinances like that. They can be a great financial tool in certain situations, but the closing costs aren’t free. You’ll always have closing costs when dealing with loans and lenders, which is why many financial experts encourage borrowers to think of a no-closing-cost mortgage as a "delayed closing cost" mortgage instead.

Finding a great mortgage refinance rate could help offset the cost of common closing fees. You can compare mortgage refinance rates with Credible.