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

Find out what it is and if it is right for you.

When you refinance a mortgage, you typically have closing costs to pay. These can include loan origination fees, loan application fees, appraisal fees, and more. These costs usually add up to as much as 2% to 5% of the loan value.

There is an alternative, though. You could pursue a no-closing-cost refinance. These loans allow you to refinance without any upfront fees, although you still eventually cover the costs of closing either in the form of a higher interest rate or a larger principal balance.

No-closing-cost refinance loans are not right for everyone, but they can make sense in some situations. Here's what you need to know about this type of loan.

What Is a No-Closing-Cost Refinance?

A no-closing-cost refinance, sometimes called a no-closing-fee refinance, involves getting a loan to refinance your mortgage without paying any fees up front. You can refinance to lower mortgage payments, take cash out, or change your rates and terms.

Regardless of the reason for getting a new loan, the key benefit of a no-closing costs refinance loan is that you get your new loan without having to pay the typical costs associated with refinancing at the time of closing.

How Does a No-Closing-Cost Refinance Work?

Typically, refinancing would involve paying a variety of closing costs, including:

• Appraisal fees
• Credit report fees
• Mortgage broker fees
• Loan origination fees
• Points, if you want to buy down your interest rate
• Recording fees
• Title insurance
• Underwriting fees

Certain types of loans, such as VA refinance loans, come with additional costs, like an upfront funding fee.

According to Fannie Mae, all these costs can add up to between 2% and 5% of the amount you're borrowing. Many people can't afford that, which can make it hard to refinance -- even if doing so is the right financial decision, because they can get better loan terms.

A no-closing-costs option allows you to still get a new loan that offers a better rate or allows you to tap your home equity without having to bring thousands of dollars to the table. . Lenders pass the costs of the refinancing onto you through either charging a slightly higher interest rate or adding the amount of the closing costs onto your principal balance, so you borrow more and pay the costs over time.

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 come with many 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.
• FHA Streamline loans: These are FHA-backed refinance loans with fewer requirements available to those with a current FHA Loan. While your lender cannot add closing costs to your principal balance, they can 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 biggest benefits of a no-closing cost refinance:

• Pay no money up front: You won't need thousands of dollars in 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.
• 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 biggest disadvantages.

• Increased interest rate: Closing costs must be covered somehow. If your lender raises your rate to cover them, you'll pay higher 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.
• Lack of savings: Refinancing may not save you money if you don't lower your rate, or 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 costs 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 the money to pay closing costs, a no-closing-cost refinance loan may be your only option.
• If you plan on selling within a few years: Paying expensive closing costs up front may not be worth it if you plan to sell soon. You can instead accept a slightly higher interest rate since you won't have the loan for long anyway.
• If you want to take advantage of lower rates 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, a no-closing cost refinance can make that happen.

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, while also offering a no-closing-cost refinance loan. 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 you must 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 you based on your finances and approves your home based on its value and condition, you can finalize your loan. You'll schedule closing, pay any fees that you still owe, and get your new refinance loan to pay off your existing mortgage.

At this point, you're done with the process and simply have to pay only the new loan until it is paid offor 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 upfront closing costs, either the costs are added to your loan balance, or you cover those costs in the form of a higher interest rate. If you sell your home soon after refinancing, it's possible you'll save on the closing fees since you won't have the loan long enough for the higher rate to cover the full amount of upfront refinancing expenses.

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.

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.