It’s becoming ‘increasingly common.’ How to refinance your home, and spend $0 at closing to do it
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With some mortgage refi rates below 3%, many people are likely pondering a refi, but wonder: Can you refinance your home without any money coming out of your pocket at the closing? The short answer is yes, but you will end up paying those closing costs down the road. (Find the best mortgage refinance rates in your area here.)
Closing costs associated with refinances tend to run about 2-5% of the total principal amount that you owe, and the average closing costs on a refi are upwards of $5,700, according to data from fintech firm ClosingCorp. Closing costs are generally made up of a variety of fees ranging from an origination fee, which the lender charges upfront to process the loan application; an appraisal fee; title search; credit report fee; and more. Needless to say, coming up with an out-of-pocket lump sum might make obtaining a refinance difficult for some people — which is why a no-closing-cost refinance can be a helpful option.
But in some cases, those fees can be rolled into the loan in what’s called a no-closing-cost refinance — meaning borrowers don’t have to pay anything upfront out-of-pocket to refinance. (Note that you may have to pay for an appraisal though: “Typically you have an appraisal only up front out of pocket, the other costs can be wrapped into the new loan,” says mortgage expert Robert Painter.) Of course, no-closing-cost refinances don’t mean a borrower is off the hook for all expenses, instead they’re just transferred to the principal or exchanged for a higher interest rate. (Compare today’s best mortgage rates here.)
“Thanks to the run-up in home prices and the increasing equity stake that homeowners are sitting on, what is becoming increasingly common is the ability to refinance without paying closing costs out of pocket, usually by rolling the fees into the loan balance,” says Greg McBride, chief financial analyst at Bankrate.
Pros and cons of a no-closing cost refinance
The pros of a no-closing cost refi are obvious: You don’t need to show up at the closing with a check. “No-closing-cost refinances have been popular for years because they live up to their name. You get to refinance and reduce your monthly mortgage payment without paying closing fees out of pocket. That’s nice when your savings account isn’t stuffed with thousands of dollars to spend on refinancing costs,” explains Holden Lewis, home and mortgage expert at NerdWallet. And, adds Painter: “The biggest pro of a no-closing-cost refi is that if rates drop again, you’re in a position to refi again with no cost and save thousands.”
But a no-closing cost refinance can mean you end up spending more out of pocket thanks to the higher interest rate. If you’re someone who plans to stay in their home for a long time, it probably makes sense to pay the closing costs upfront, because you’ll pay those once while you could be paying that higher interest rate for decades to come.
Can a no-closing cost refinance save me money?
If you don’t plan to stay in the home for long, this could save you money, says Painter. That’s because closing costs are thousands of dollars, and the slightly higher interest rate you’re paying for the no-closing cost refinance might take awhile to add up to what the closing costs would have been.
The no-closing cost refi also might make sense over, say, a home equity loan in some cases: Because interest rates on mortgages are often lower than home equity loans, a no-closing-cost refi can mean that even if you have a higher rate, you could end up paying less than you would with another loan. (Find the best mortgage refinance rates in your area here.)
