A no-closing-cost refinance may sound too good to be true. It’s not a free mortgage: You’ll still pay the fees, but they’re rolled into your loan or exchanged for a higher interest rate.
If mortgage refinance rates are low and the upfront fees are holding you back, a no-closing-cost refinance could be a good option — especially if you’re planning to stay in your house for only a few more years. Here’s how to decide if a no-closing-cost refinance is right for you.
How a no-closing-cost refinance works
Refinance closing costs usually range from 2% to 6% of the loan amount. These are the miscellaneous fees you pay to finalize your refinance, such as the origination fee, appraisal cost and title services.
Typically, you pay closing costs all at once when the loan is complete. But some lenders offer “no-closing-cost” mortgages to qualified borrowers. Instead of charging you fees up front, the lender will offset the expense by:
- 📈 Charging a higher interest rate: The lender charges a higher mortgage rate to cover the closing costs. Over time, the higher rate may cost the borrower more than the original closing costs.
- 💰Wrapping the fees into the financing: The lender may roll the refinance fees into the total principal balance you’ll owe. It’s a different method with the same result: a higher payment, since the fees plus interest are paid over the life of the loan.
TL;DR: Either you pay the costs now or you pay them later. One way or another, they’re still coming out of your pocket.
» MORE: How to refinance your mortgage
When to choose a no-closing-cost refinance
Is a no-closing-cost refinance just a flashy offer, or actually a good deal? That depends on your circumstances.
A no-closing-cost refinance might be a good fit if:
- 🚚 You’re planning to move soon: Let’s say you plan on staying in a home for only a couple of years. In that case, you’re unlikely to break even from a typical mortgage refinance, since it takes time for your savings to outweigh the upfront costs.
- 💸 You have limited savings: If you don’t have the cash to pay for closing costs up front, or you need the money for something else, a no-closing-cost refinance might be your best option.
However, not every lender offers a no-closing-cost refinance. To get the best deal, shop around and compare quotes from at least three lenders.
Nerdy Perspective
What about “buy now, refinance later” deals?
With mortgage rates stuck above 6%, some lenders are advertising reduced fees when you refinance with them later. But you can still shop around! It might end up being a good deal, but you won’t know the best one until you compare it with other offers.
The downside of a no-closing-cost refinance
While a no-closing-cost refinance reduces your upfront costs, it may mean a higher monthly payment and more interest paid over the life of the loan. If you’re putting down roots for a longer period of time, it usually makes more financial sense to pay the closing costs up front.
🤓Nerdy Tip
Read the fine print to avoid surprise fees. Lenders may add a prepayment penalty to the loan to discourage you from refinancing again before they’ve made back their costs.Pros and cons of a no-closing-cost refinance
There’s no one “good” or “bad” way to refinance. The best choice depends on your goals. To recap a no-closing-cost refinance:
Pros
No upfront fees to pay (or save up for).
Shorter break-even point.
Can come out ahead if you plan to sell within 5 years.
Cons
Higher monthly payment.
More interest paid over the life of the loan.
Costs add up the longer you stay in the house.
How to decide
When you apply for a loan, each lender will supply an official Loan Estimate detailing the costs and terms they’re offering. Get a few quotes for each type of refinance — with and without upfront fees. Then, use the Loan Estimate to review each option side by side.
Pay attention to these key numbers:
- Interest rate.
- Monthly payment.
- Total closing costs.
You can also compute the break-even point for how long it would take to recover the closing costs on a loan. Then, compare that against the no-closing-cost mortgage.
🤓Nerdy Tip
Do you have bad credit? Expect to pay higher rates and fees when refinancing your mortgage. Our list of best home loans for bad credit features lenders that are willing to work with lower scores.To do the math, try 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.
NerdWallet writer Isabella Angelos contributed to this story.
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