A Guide To The No-Closing-Cost Refinance
Many homeowners underestimate exactly how much they need to pay in closing costs during a mortgage refinance. Are closing costs stopping you from getting a refinance? If so, a no-closing-cost refinance (refi for short) might be right for you.
This article will take a look at the true cost of a no-closing-cost refi, explain a little more about closing costs and discuss why you'd want to choose a no-closing-cost refinance for your home.
What Is A No-Closing-Cost Refinance?
As the name suggests, a no-closing-cost refinance is a refinancing option where you don't have to pay closing costs when you get a new loan. But just because there are no upfront costs doesn't mean that your mortgage lender foots the bill for free. No-closing-cost refinances don't get rid of a borrower's expenses – they only move them into your principal or exchange them for a higher interest rate.
The simplest no-closing-cost mortgage refinance takes the amount that you would have paid during closing and tacks it onto what you owe on your new mortgage. In other words, your lender adds the balance of your refinance closing costs to your principal, the unpaid balance of your loan. This increases your monthly payments but doesn't affect your interest rate.
Your lender may also allow you to take a higher interest rate in exchange for waiving your closing costs. Your interest rate is the amount you pay to your lender per month for borrowing. Refinance interest rates depend on many different factors. A higher interest rate doesn't change your principal amount, but you'll pay more each month and in the total interest paid.
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Average Closing Costs When Refinancing A Mortgage
Loan Origination Fee
You'll pay an origination fee to your lender to prepare your loan. The average origination fee is 0.5% – 1% of the loan amount and covers the application fee, underwriting and other administrative costs. This is listed in the same origination charges section of your loan estimate as discount points.
Appraisal Fee
During an appraisal, a professional comes to your property to assess its value. When you refinance, you'll need to get an appraisal or other form of home valuation to ensure your property value hasn't drastically changed since you bought the home. Lenders will use the appraisal to calculate your loan-to-value (LTV) ratio to help them determine the financial risk of your refinance.
Most appraisers charge $300 – $500 for their services. The cost can be higher depending on square footage, the number of units and the distance the appraiser has to travel, among other factors.
Title Fees
You receive a document called a deed, among other closing documents, when you buy a piece of real estate. A deed shows that the seller transferred legal ownership, or the title, of the home to you. Title insurance protects you from errors in the ownership records of your home or property. You'll need to pay for the title search and buy a new lender's title insurance policy when you refinance your mortgage loan because the refinance is a new loan. Most title insurance companies offer significant discounts for returning customers who already got a policy when they first bought the home.
VA Funding Fee
If you’re refinancing a VA loan, you'll need to pay a percentage of your new loan back to the Department of Veterans Affairs (VA). The amount you pay for the VA funding fee depends on the type of refinance being done as well as the amount of equity you’ll have after the refinance and whether it's your first time using a VA loan.
If this is your first time using a VA loan and you're refinancing from a different type of loan, the funding fee is up to 2.15%. If you're coming from a different type of mortgage, but you've used a VA loan in the past, the funding fee is up to 3.3% of the loan amount.
If you're doing a refinance where you're going from one VA loan to another – a VA Interest Rate Reduction Refinance Loan (IRRRL), also known as a VA Streamline refinance – the funding fee is just 0.5% of the loan amount.
Some borrowers are exempt from paying the VA funding fee, including those receiving VA disability. Additionally, surviving spouses receiving Dependency Indemnity Compensation (DIC) are exempt. Finally, the exemption applies to Purple Heart recipients who are on active duty.
Mortgage Insurance
Federal Housing Administration (FHA) loans have an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount if you're refinancing from another type of loan to an FHA loan or if you're doing an FHA Streamline (from one FHA loan to another). In either case, these can be built into the loan balance.
Conventional loans have the option of what's called single-pay mortgage insurance. Rather than pay for private mortgage insurance (PMI) every month until you get to have at least 20% equity or opt for the higher rate associated with lender-paid mortgage insurance (LPMI), you can choose to pay off some or all of the mortgage insurance policy at closing in order to get a lower rate for the life of the loan.
Credit Report Fee
Lenders need to ensure that your credit score hasn't gone down since you initially bought your home. They'll also check for financial issues like unpaid student loans or credit card debts. Some lenders pass the fee of checking your credit score back onto you during closing. Credit report fees typically range from $25 – $50 depending on the lender and your state of residence.
Discount Points
Discount points are optional – they're the fee you pay your lender in exchange for a lower interest rate. Each point costs 1% of your total loan amount, and you can buy multiple points. For example, one point on a $100,000 refinance would cost $1,000. You may also see these referred to as prepaid interest or mortgage points.
Whether it makes sense to purchase discount points depends on the amount you save on your monthly mortgage payment by buying them and how long you plan to stay in the house.
Let's say you're considering whether to purchase 2 points on a $300,000 loan to save $75 per month. The points would cost you $6,000, and the key is to calculate the breakeven point. In this case, that's 80 months ($6,000/$75 equals 80).
If you plan to stay in the home for at least 6 years and 8 months, then purchasing the points to lower your refinance rate makes sense. If you don't plan to stay that long, either don't buy the points or buy a smaller number of them.
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Other Costs Associated With The No-Closing-Cost Refinance
You can choose between two different options with a no-closing-cost refinance: either an increased interest percentage or a higher loan balance. Not every lender offers both types of no-closing-cost refinances, so make sure your lender can offer you the option you want.
Increased Mortgage Rates
You'll need to accept a higher interest rate if your lender offers you a no-closing-cost refinance without adding funds onto your principal. A higher interest rate doesn't change your principal loan amount. However, even a small change in your interest rate can mean you’ll pay much more over time.
Say you refinance your $150,000 home at 3.5% interest over a 15-year term. Your closing costs would usually be between 2% – 6% of your total loan amount. If your closing costs are $6,000, you’d end up paying a grand total of $43,018.31 in interest over the course of your refinance with this interest rate. The total will be a little over $49,000 when you add in your closing costs.
Now, your lender offers to waive your closing costs if you agree to take the same loan but with an interest rate of 4.1%. In this instance, the total amount you’d end up paying in interest by the time you pay off your loan is $51,071.47. This means that you’d pay over $2,000 more for your loan.
As the interest rate increases, the total amount that you end up paying increases. Crunch the numbers before you agree to take a loan with a higher interest rate.
Higher Loan Balance
When you choose to roll in your closing costs, your total loan balance increases. For example, let's say that you're refinancing a $150,000 loan with $5,000 in closing costs. With closing costs rolled in, your new balance is $155,000.
Let's compare the difference between a $150,000 refinance and a $155,000 refinance at a 3.5% interest rate. Let's also assume that the loan's term is 15 years. For the $150,000 refinance, your monthly payment would be $1,072.32, including principal and interest. With a $155,000 refinance, your monthly payment would be $1,108.07. That's a difference of about $36 a month. Because there's a higher balance, you'll also pay $1,433.89 more in interest than you would on the $150,000 loan, although the increase isn't as great as what we saw by taking the higher interest rate on the same loan amount.
Before you roll in your closing costs, make sure you can cover the higher monthly payment.
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FAQs For No-Closing-Cost Refinancing
What are the benefits of a no-cost refinance?
A no-closing-cost refinance can allow you to keep your refinance plans on track. If you're planning to refinance and you need money to cover a sudden bill, a no-closing-cost refinance can actually save you money.
Interest rates on mortgages are usually lower than home equity loans, which means that even if you take a slightly higher rate, you may end up paying less compared to another type of loan.
When does a home refinance with no closing costs make sense?
No-closing-cost refinances work best if you plan to stay in your home for less than 5 years. This allows you to avoid paying closing costs as a lump sum and you'll sell the home before you pay thousands more in interest over the life of the loan.
The less time you plan to live in your home, the more it makes sense to choose a no-closing-cost refinance.
When would a refinance without closing costs not work?
If your current home is your "forever" home, you'll usually end up paying more over time with a no-closing-cost refinance than you would by paying your closing costs upfront.
The Bottom Line
Choosing a no-closing-cost refinance may make sense if you don't plan on staying in your home for very long. But if you plan on living in your home for a long time, you may end up paying thousands more in interest by taking a no-closing-cost loan. Whether a no-closing-cost refinance will work for you depends on your personal finances and current housing situation.
If you feel ready to refinance, no-closing-cost or otherwise, apply online today and get started with Rocket Mortgage® or give us a call at (833) 326-6018.
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Kevin Graham
Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.
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