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

May 16, 2019

If you choose no-closing-cost refinancing, you can refinance your home loan without having to pay upfront closing costs related to appraisal, processing, underwriting, and other fees. Your mortgage company will waive these closing costs, and in exchange, you will pay a higher interest rate for the life of your loan.

For example, the average refinance rate for a 15-year fixed-rate mortgage was 4.41 percent late in May 2018, according to Zillow. Under the terms of a traditional home loan refinancing plan, a homeowner may be required to pay thousands of dollars in closing costs to take advantage of this interest rate. A no-closing-cost refinance allows a homeowner to roll closing costs into a new home loan, but will pay a higher interest rate on monthly mortgage payments in comparison to the interest rate associated with typical home refinancing options.

Bank calculates home loan rate

Bank Calculates Home Loan Rate. Source: Getty

What Are the Advantages of a No-Closing-Cost Refinance?

A no-closing-cost refinance generally makes sense for you if you plan to stay at your residence for five years or less. In this scenario, the total costs associated with monthly home loan interest are unlikely to exceed the total amount you would otherwise pay in closing costs.

For example, if you’ve had your loan for a number of years at a 6.5 percent interest rate and you’re only planning on staying in that house for a few more years, a no-closing-cost refinance is a smart option for you. The slightly higher mortgage rate you’ll incur from a no-closing-cost refinance will likely still be less expensive over five years than what you’d pay upfront with closing costs.

Additionally, a no-closing-cost refinance often represents a viable option for homeowners who plan to upgrade their residences. A recent HomeAdvisor survey indicated average spending on home improvement projects rose $1,850 between February 2016 and February 2017. Homeowners tackled more home improvement projects during this time frame year-over-year. With a no-closing-cost refinance, you may be better equipped to reduce monthly mortgage payments while allocating the savings toward various home improvement projects.

What Are the Disadvantages of a No-Closing-Cost Refinance?

You will trade off closing costs for a higher interest rate with a no-closing-cost refinance. You may have to plan carefully to avoid struggling to make payment and to maximize your savings. You could pay more overall on a no-closing-cost refinance than you would with your current home loan, especially if you plan on remaining in your home for more than five years.

Bankrate offers the example of two hypothetical situations. You have a home loan of $150,000 with one rate of 3.75 percent and closing costs of $3,500 as one option, or 4.25 percent with no closings costs as the second option.

If you choose the higher rate with no closing costs, you’ll pay around $43 per month more, or $15,657 more over 30 years. For this example, it takes six years and nine months to recover the closing costs you’d pay with the lower monthly payments.

For homeowners who are considering a no-closing-cost refinance, leave nothing to chance. Consult with lenders if you are unsure about how this type of loan will affect your monthly mortgage payments so you can weigh the pros and cons and determine if this option is right for you.

How to Find the Right Lender for a No-Closing-Cost Refinance

Lenders are available in cities and towns nationwide, and they are happy to teach you about all aspects of no-closing-cost refinancing. However, not all lenders are created equal. If you fail to review all of your no-closing-cost refinance options, you risk paying more for your home for the duration of your new loan.

banking agreement

Banking Agreement Source:Gettty

Let’s take a look at tips to help you find the right lender for a no-closing-cost refinance.

  • Evaluate all of the options at your disposal: Treat a no-closing-cost refinance the same way you would treat a new mortgage. Your ultimate goal is to find a favorable interest rate, ensuring you can pay as little as possible for your home loan. You can then choose a lender to provide a no-closing-cost refinance to match your expectations.

  • Ask questions: A no-closing-cost refinance may seem overwhelming, particularly for a homeowner who is refinancing a home loan for the first time. Fortunately, lenders understand the ins and outs of no-closing-cost refinancing and are happy to answer your questions with insights you need to make an informed home loan decision.

  • Do your homework: One of the best ways to evaluate a no-closing-cost refinance is to perform calculations yourself. If you compare the closing costs associated with refinancing your home loan versus the total amount of interest you will pay over the course of the mortgage, you can take a data-driven approach to determine the cost savings with no-closing-cost refinance options. If the amount of interest paid on a no-closing-cost refinance loan exceeds the closing costs associated with a standard refinance, reconsider your refinancing plans.

  • Assess your credit score: A recent Bankrate survey showed 46 percent of Americans checked their credit score within the past year, and 14 percent examined their credit score within the past three years. Lenders will evaluate your credit score to determine if you are eligible for a no-closing-cost refinance. If your credit score is low, take steps to improve it. The three credit reporting bureaus, Equifax, Experian, and TransUnion, can provide you with a free copy of your credit report annually at annualcreditreport.com. If you have outstanding debt, pay it off to boost your credit score, and if you identify errors on your credit report, notify the credit reporting bureau immediately.

How to Evaluate a No-Closing-Cost Refinance

Choosing a no-closing-cost refinance can get confusing, but there are many factors you can evaluate to take the guesswork out of selecting one of these loans. These factors include:

  • Escrow Payments: Ask the lender if you can avoid setting up an escrow account for payments for property tax and insurance payments. Many lenders will allow you to make these payments on your own without holding a monthly amount in escrow, but some require the safety net of the escrow. If you can avoid an escrow account, you will have a lower monthly mortgage payment.

  • Loan-to-Value (LTV) Ratio: Loan-to-Value (LTV) Ratio: Lenders use LTV ratio to evaluate a borrower’s risk before approving a mortgage. Calculate the LTV by dividing the total mortgage amount by the appraised value of the home. In some instances, lenders won’t require private mortgage insurance (PMI) if your LTV ratio is 80 percent or lower. If your LTV exceeds 80 percent, your lender will require PMI payments, resulting in higher monthly interest rates.

  • Your Future Plans: How long do you plan to stay in your home? If a no-closing-cost refinance drives your monthly mortgage payment higher, determine how this affects your ability to save for moving to another house.

Consulting with a home financing advisor is ideal since they can provide comprehensive insights into no-closing-cost refinancing and other home loan options. These specialists, found in banks and other financial institutions, can offer recommendations and suggestions to help you make the best possible no-closing-cost refinance decision. If you already have a general financial advisor, they can help you choose the best loan option to fit your financial goals as well.

Bottom Line:

A no-closing-cost refinance offers a terrific choice for homeowners who want to get a new mortgage with no upfront costs, but this type of financing is not right for everyone. Evaluate all of your no-closing-cost refinance options and consider the short- and long-term ramifications of your decision, then plan accordingly.