Is a No-Closing Cost Refinance Worth it?
A no-closing cost refinance is when a borrower decides not to pay the upfront refinance fees on their mortgage and in order to get a higher balance on their loan or a higher loan rate. These refinance fees normally range anywhere between $2,800 and $4,000, so let’s go over whether or not this could be a good option for you.
What is a No-Closing Cost Mortgage?
Some of the primary reasons people choose to refinance their mortgage include:
- Getting a lower mortgage rate (resulting in a lower monthly payment)
- To combine two mortgages into one mortgage
- To avoid mortgage insurance
- To access cash from their home equity (increasing their loan balance and monthly payments)
Regardless of the reason for refinancing, it counts as a new financial transaction that costs around $2,800 up to $4,000 depending on the home value, market conditions, and loan size. This cost usually consists of appraisal fees, title fees, underwriting fees, and settlement fees.
Lenders will often mention “no-closing costs” as a marketing tool for their mortgages, but this does not mean that the fees can be avoided altogether. Usually, they have just been re-added into the mortgage process in a different way.
How Does Choosing a No-Closing Cost Mortgage Affect the Rate?
The main way that lenders can still get the fees that they would normally get from closing costs is to increase the loan rate. Choosing not to pay closing costs will mean you pay a higher loan rate, but how high that rate actually gets is determined by the loan amount. If your loan amount is smaller, your rate will be higher so that the closing costs can be covered. Generally, it is common to expect the rate to be anywhere between 0.25% – 0.5% higher if you choose a no-closing cost mortgage.
So say you wanted to refinance to a $200,000 zero-closing cost mortgage loan. You might have to pay for a rate that is 0.375% higher throughout the lifetime of the loan compared to a lower rate if you paid the closing costs. This would mean that throughout this loan term you will pay about $42 more each month, but you wouldn’t have to pay $3,000 in closing costs upfront.
What is the Adjustment on the Loan Amount?
A different way that the closing costs are re-allocated is by adding in the closing costs to the loan amount. So in the example above, the closing costs were about $3,000 for a $200,000 loan. In this scenario the loan amount would adjust to $203,000, increasing the monthly payment by around $13. In this case you would still be able to get the lower rate, unlike the example above.
Which Option is Best?
Each scenario for no-closing cost refinancing is different. Oftentimes borrowers will choose the loan amount adjustment rather than the rate adjustment because the monthly payment increase is less, and the rate remains lower. But the rate markets are constantly adjusting, so they are important to consider as well. Make sure your loan officer is away of your entire situation so that they can recommend the best options for you.
Are No-Closing Cost Mortgages Only For Refinancing?
These loans are most commonly used for refinancing, but there are cases where they are used as purchase loans as well. However, in the event of using a no-closing cost mortgage, the most likely way a lender will reallocate the costs is by increasing the rate rather than the loan amount because adjusting the loan amount interferes with the borrower’s LTV ratio.