What Is a No-Closing-Cost Refinance and Is It Right For You?

Eligible Loan Types for a No-Closing-Cost Refinance

Can you refinance without closing costs? Many types of loans are eligible for a no-closing cost refinance, including the following:

• Conventional loans: Conventional loans are not guaranteed by the government. Lenders who offer these loans may provide no-closing-cost options.
• VA Loans: VA refinance loans generally come with closing costs, including upfront funding fees. If you refinance an existing VA Loan using a VA IRRRL loan, you can include the costs in your new loan or get a loan with a higher rate to cover them. Eligible borrowers may be exempt from the VA Funding Fee.
• FHA Streamline loans: These are FHA-backed refinance loans with fewer requirements which are only available to those with a current FHA Loan. While your lender cannot add closing costs to your principal balance, they may be able to charge a higher rate to cover them so you can close with no out-of-pocket expense.

Why Should You Consider a No-Closing-Cost Refinance?

There are both pros and cons of choosing a no-closing cost refinance, so you'll need to weigh the advantages and disadvantages to decide if this kind of loan is right for you.

Pros of a No-Closing-Cost Refinance

Here are some of the benefits of a no-closing cost refinance:

• Pay no money up front: You won't need to pay cash for closing costs just to be able to refinance your loan.
• Have lower monthly costs: If a no-closing cost refinance enables you to refinance to a new loan with more favorable terms, it may allow you to lower your monthly payments. By refinancing, the total finance charges may be higher over the life of the loan.
• Use closing-cost money for other things: If you have other financial goals, you can use the money for those instead of paying large fees to close on your loan.

Cons of a No-Closing-Cost Refinance

There are also some downsides to a no-closing cost refinance that you need to consider as well. Here are some of the disadvantages.

• Increased interest rate: Closing costs must be covered somehow. If your lender raises your rate to cover them, you'll pay higher (and more) interest over the life of the loan.
• Increased loan balance: If your lender adds your closing costs to the loan balance instead of raising your rate, you will owe more money on your home and pay interest on a larger loan balance.
• Lack of savings: Refinancing may not save you money over the life of the loan if you don't lower your rate, if you borrow more, or choose a longer repayment timeline and end up paying interest for longer.
• Possible additional fees: There may be some costs, such as prepaid interest, that you still have to pay to close on your loan.

Is a No-Closing-Cost Refinance Right for You?

A no-closing-cost refinance can be the right choice in some circumstances, but not in others. Here are some signs that this type of loan may work best in your situation:

• If you have limited cash to spend: If you don't have the money to pay closing costs in cash upfront, a no-closing-cost refinance loan may be your only option.
• If you plan on selling within a few years: Paying closing costs up front may not be worth it if you plan to sell soon. You may find that accepting a slightly higher interest rate makes more sense if you plan to sell or refinance your loan before you break even on the refinance costs. Talk to your lender, who can help you make an informed decision based on your individual circumstances.
• • If you want to take advantage of lower rates or a different term without up-front fees: If you don't want to tie up your cash but you do want to refinance to reduce your mortgage rate or reduce or extend your loan term, a no-closing cost refinance can make that happen. By refinancing, the total finance charges may be higher over the life of the loan.

How To Refinance with No-Closing-Costs

If you want to refinance with no closing costs, the first thing you'll need to do is make sure you meet the requirements to refinance a home. These vary by lender but typically include having at least fair or good credit, not owing more than your home is worth, and having proof of enough income to repay the loan.

Next, shop around for lenders to find one that offers competitive terms, and compare a traditional refinance with a no-closing-cost refinance option. Many lenders offer this type of loan, so look for one that has a reasonable interest rate and a choice of loan options.

After finding the right lender, move forward with the refinancing process by submitting your loan application. Your lender may require an appraisal and a survey, and, depending on the type of refinance you select and are eligible for, you may go through the underwriting process, which involves the lender checking your financial credentials. In some cases, for streamline VA and FHA refinances, you may be able to skip or simplify these steps.

Once your lender approves your loan request, you can finalize your loan. You'll schedule closing, pay any fees that you still owe, and get your new refinance loan to replace your existing mortgage.

At this point, you're done with the refinance process and simply have to pay only the new loan until it is paid off or you decide to sell or refinance again in the future.

No-Closing-Cost Refinance FAQs

Still need to know more? Here are the answers to some key questions about no-closing-cost refinances.

Can You Refinance Without Closing Costs?

It's possible to get a mortgage refinance loan without upfront closing costs. You'll need to look for a lender that offers no-closing-fee refinances. Closing costs don't disappear just because you don't pay them up front, though. Your lender may raise your interest rate or add closing costs to your principal balance to cover the expenses.

How Much Money Can You Save with a No-Closing-Cost Refinance?

When you don't pay closing costs in cash, upfront, you still pay the costs, just in a different way. Either the costs are added to your loan balance, or you cover those costs in the form of a higher interest rate.

Your refinance loan, in general, may save you money compared to your current home loan if you reduce your interest rate without extending your repayment time for too long. However, by refinancing, the total finance charges may be higher over the life of the loan.

Final Thoughts on No-Closing-Cost Refinances

A no-closing-cost refinance can make sense if you want to refinance your home loan and can't or don't want to pay closing costs up front. However, it's important to remember you do pay these costs over-time. Talk with your loan provider about whether paying the closing costs right away is a better option or whether you should choose a loan that allows you to pay the fees over time.