NOTE: Due to the coronavirus outbreak, refinancing may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues. If you can’t pay your current home loan, refer to our mortgage assistance resource. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s financial guide to COVID-19.
A no-closing-cost mortgage may sound too good to be true. When refinance rates are favorably low — but scraping together the upfront fees is discouraging you from refinancing your mortgage — a no-closing-cost refinance may be worth considering, especially if you’re planning to stay in your house for only a few more years.
How a no-closing-cost refinance works
Refinance closing costs can amount to 2% to 5% of your principal balance. These are the charges for an appraisal, title search, recording fees and all the rest. But lenders sometimes package “no-closing-cost” mortgages for qualified borrowers. This can be achieved in a couple of ways.
Charging a higher interest rate. The lender may cover the expense of no-closing-cost refinance by raising the mortgage rate on the loan. That way the lender will recoup the closing costs, and possibly much more over time, while enticing more loan business.
Wrapping the fees into the financing. The lender may roll the “no-cost” refinance fees into the total principal balance you’ll owe. It’s a different method with the same result: a higher payment, as the fees plus interest are paid over the life of the loan.
» MORE: How to refinance your mortgage
Pros and cons of a no-closing-cost refinance
No upfront origination fees paid at closing.
Not paying big upfront fees means a shorter break-even point.
You’ll owe a higher monthly payment.
You’ll likely pay more interest over the life of the loan.
» MORE: Calculate your closing costs
When to choose a no-closing-cost refinance
Hoping to move up to another house fairly soon? The no-closing-cost mortgage refinance may be for you. If you plan on staying in a home for just a couple of years, you probably couldn’t recoup in refinance savings the upfront fees you’d pay anyway.
And it’s the only option — other than waiting to buy — for those who simply don’t have the savings to cover all of the upfront closing costs.
“It’s the only option — other than waiting to buy — for those who simply don’t have the savings to cover all of the upfront closing costs.”
However, not every lender offers a no-closing-cost option. According to NerdWallet's research, only a few lenders openly advertise a no-closing-cost refinance program. In fact, U.S. Bank was one of the only national lenders that we found promoting a specific zero-closing-cost refinance program.
It pays to shop around with a few different lenders since local banks and credit unions could be more likely to advertise these options.
The downside of a no-closing-cost refinance
If you’re putting down roots for a longer period of time, you probably should consider paying the closing costs upfront. It’s just a matter of doing a little math.
While your upfront costs are reduced with a no-closing-cost refinance, the result is a higher payment and perhaps significantly more interest that will be paid over the life of the loan. Lenders may also add a prepayment penalty provision to the loan to discourage you from refinancing again before they’ve recouped their costs.
Running the numbers
To make a wise decision, ask the lenders you are considering to provide an analysis of the closing costs, as well as the difference in interest rates and payments for a no-closing-cost refinance compared to a loan with upfront fees. With an application, each lender will supply an official Loan Estimate detailing the costs and terms they’re offering.
You can also compute the “break-even” point for how long it would take to recover the closing costs on a loan and compare that against the no-closing-cost mortgage.
Want us to do the math for you? Using the NerdWallet refinance calculator, input the terms of the refinance with no closing costs, and then the terms of the standard refinance with upfront fees. The calculator will show your break-even points, as well as monthly payment and savings.