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How a no-closing-cost refinance works — and how to get one

Yahoo Personal Finance· Getty Images
Aly J. Yale
·Freelance writer
Updated 7 min read

Refinancing your mortgage can sometimes be a smart move. You could lock in a lower interest rate, reduce your monthly payment, choose a new loan term, or even remove mortgage insurance from your monthly costs.

Unfortunately, mortgage refinances aren’t free for homeowners. As with your first mortgage, you’ll face closing costs when refinancing. While these vary by lender, the national average closing costs when refinancing is around $5,000.

With a no-closing-cost refinance, you may be able to avoid these costs — at least at the outset of your loan. But they don’t remove the fees entirely. Here’s what to know about these refinances and why you might want (or not want) to choose one.

Read more: 5 strategies to prepare for a mortgage refinance

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A no-closing-cost refinance works like a traditional rate-and-term refinance — replacing your old mortgage loan with a new mortgage — only instead of paying for closing costs up-front, those fees are rolled into your mortgage principal and paid off over time.

This means you don’t have to pay for common charges like an origination fee, underwriting fee, or credit report right away.

Let’s say you are refinancing your $250,000 mortgage and owe $5,000 in closing costs. You could do a no-closing-cost refinance for $255,000, financing both the balance of your old mortgage and the closing costs you owe your lender.

Alternatively, some lenders may credit you for the closing costs but charge you a higher mortgage interest rate on the loan instead.

Learn more: Closing on a house — What to expect and how to prepare

Your closing costs won’t be exactly the same when refinancing as when you got your current mortgage. For example, you won’t need a home inspection this time around. But you will still have to cover some of the same costs, either by paying them in a lump sum on closing day or rolling them into your principal amount.

  • Credit score report fee: The mortgage lender will check your credit score to make decisions about your approval, interest rate, and more. Credit report fees are often less than $30, though it depends on your lender and location.

  • Loan origination fee: The origination fee covers several things, such as processing your application and underwriting the loan. Depending on the lender, this may show up as an “application fee” or “underwriting fee” on your documents instead. It typically costs 0.50% to 1% of your new loan amount.

  • Home appraisal fee: You must get another home appraisal when you refinance to determine your home’s current market value. According to the National Association of Realtors, the median appraisal cost in the U.S. in 2023 was $500. However, appraisal fees vary depending on where you live and the size of your home.

  • Discount points: You have the option to pay for a lower rate on your new mortgage by buying discount points at closing. Usually, one discount point costs 1% of your loan and results in 0.25% discount on your interest rate.

  • Property taxes: There may be prepaid property taxes for the remainder of the calendar year at closing.

  • Title search and title insurance: You’ll have to pay for the title search again, and you’ll probably be required to pay for lender’s title insurance upon refinancing.

  • Mortgage insurance: You may not have to pay for private mortgage insurance if you’re refinancing a conventional loan and have 20% equity in your home. But you’ll likely have to pay a mortgage insurance premium (MIP) on an FHA loan. You’ll also pay a funding fee (which is similar to mortgage insurance) when refinancing a VA loan.

Dig deeper: What is mortgage insurance, and how does it work?

If you’re going to refinance a mortgage, no closing costs sound pretty good — especially if your main motivation behind refinancing is to save money in the short term. However, there are downsides to this strategy too.

Here’s a look at the pros and cons you should consider before pursuing a no-closing-costs refinance loan.

The primary benefit of a no-closing-cost refinance is that it reduces borrowers' up-front costs. You won’t need to drain your savings account or come up with thousands of dollars to refinance your loan.

Because of this, you may also be able to refinance sooner than you could have otherwise. This might mean taking advantage of better mortgage rates or lowering your monthly mortgage payment quickly if you’re experiencing financial difficulties.

Finally, a no-closing-cost loan could free up cash for other expenses, like home repairs or improvements. You may even be able to pay off higher-interest debts (since mortgage loans tend to have lower rates than credit cards and other financial products).

Learn more: How soon can you refinance a mortgage?

Many no-closing-cost refinances come with higher interest rates than traditional refinances, as they’re considered riskier loans. This could mean a higher rate and monthly payment than you initially intended to achieve with your refinance.

Additionally, rolling your closing costs into your loan means a larger principal balance — which you’ll pay interest on for the life of the loan. Depending on your interest rate and how much your balance increases, it could mean paying more in interest over the long haul.

There’s also the chance that increasing your loan balance reduces your equity enough to trigger mortgage insurance requirements. On conventional loans, you’ll usually pay for private mortgage insurance (PMI) if you have less than 20% equity in your home. This typically adds about $30 to $70 to your monthly payment for every $100,000 borrowed, according to Freddie Mac.

Dig deeper: How to get rid of PMI

No-closing-cost mortgage refinances aren’t the only option for borrowers who are short on funds but want to refinance. You can also negotiate with your lender. Depending on market conditions and how competitive they want to be, they may be willing to reduce or cover some of the closing costs for you.

You can compare companies to find the best mortgage lender with low fees. Closing costs vary from one mortgage company to the next, so getting refinance quotes from at least a few options can help you reduce your costs.

You can also shop around for some of the services included in your closing costs. On page two of your loan estimate form, there should be a section labeled “Services You Can Shop For.” Items listed here are not set in stone, and you’re free to price shop and compare providers to get the best deal.

Learn more: 7 types of home refinance options

Yes, you must pay closing costs every time you refinance your mortgage, because you are getting a new mortgage to replace your old one. However, if you choose a no-closing-cost refinance, you won’t have to pay up-front closing costs — instead, you’ll roll those fees into your mortgage principal so they become part of your balance.

You can refinance without paying closing costs up-front, but you’ll pay them in some other form later on. Some lenders will roll the closing costs into your loan amount, increasing your balance and long-term interest costs. Others charge a higher interest rate in exchange for covering your closing costs.

Yes, closing costs — and other mortgage terms — are negotiable when refinancing. Get quotes from different lenders and use these quotes to negotiate the best deal. Ask these lenders questions if you’re unsure what a particular closing cost is.

While some lenders offer no-closing-cost mortgage refinances, they’re not technically free. You’ll pay for those closing costs either as part of your loan balance or as a higher interest rate.

Many banks and mortgage lenders offer no-closing-cost refinances. To get the best deal, get quotes from several companies.

Zero-closing-cost refinances aren’t free. Lenders either roll the closing costs into your loan balance, charge you a higher interest rate, or both. Make sure you know how your lender is structuring your no-closing-cost refinance before signing on the dotted line.

This article was edited by Laura Grace Tarpley