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  • Mortgage refinance closing costs typically cost 3% to 6% of your loan amount.
  • With a no-closing-cost refinance, you won't pay thousands at closing when you get your new mortgage.
  • Instead, you'll either incur a higher interest rate or roll the costs into your mortgage principal.

For homeowners looking to lower their housing costs with a refinance, closing costs are often a big drawback. While getting a new mortgage with a longer term or lower interest rate can cut the amount you spend each month on your mortgage payment, you'll generally need some cash up front to get that benefit.

That is, unless you opt for a no-closing-cost refinance. While this type of refinance can be helpful for borrowers who want the benefit of refinancing without paying closing costs, it can get expensive in the long term.

What is a no-closing-cost refinance?

A no-closing-cost refinance is just what it sounds like: You refinance your mortgage but don't have to pay the usual closing costs when you close on the new loan.

You may not have to pay closing costs in one lump sum, but you'll still have to pay the money over time. The lender just finds a different way to charge you. There are two main ways you could end up paying closing costs:

  • Roll costs into the principal. The lender calculates how much you would have paid in closing costs, then adds that amount to the total you borrow, or the principal. This means your monthly payments will be higher than if you had paid closing costs upfront.
  • Pay a higher interest rate. In this case, your mortgage principal won't change, but the lender will charge you a higher interest rate on your mortgage. Rates are factored into your monthly payments, so this method results in higher payments, too.

Either way, a no-closing-cost refinance means foregoing a large payment upfront in exchange for paying off the costs over time.

Average refinance closing costs

Your refinancing closing costs depend on several factors, including where you live and which lender you use.

According to the Federal Reserve, closing costs usually come to 3% to 6% of your refinanced mortgage principal. So if your new mortgage is for $100,000, you could pay $3,000 to $6,000 at closing.

Your closing costs could include any or all of the following, depending on your situation:

If you're shopping around for refinancing lenders, you may want to ask for an itemized list of fees from each company. Seeing how much each lender charges could help you decide if you want to pay upfront or go with a no-closing-cost refinance.

Should you get a no-closing-cost refinance?

The pros of a no-closing-cost refinance

  • You don't have to pay a large lump sum. Closing fees take a huge chunk out of your wallet all at once. Choosing a no-closing-cost refinance can soften that financial blow early on.
  • It could be good if you plan to move soon. It may not be worth it to pay thousands in closing costs if you plan to move in a few years because you need time before you break even. But you can get out of the big one-time payment with a no-closing-cost refinance. This means you could start benefitting from your refinance sooner. Plus, the refinance will be less expensive for you overall, because you won't be paying the loan off for as long and accruing interest.

The cons of a no-closing-cost refinance

  • The expenses will pop up somewhere else. Remember that a no-closing-cost refinance doesn't actually mean you won't pay closing costs. You'll still end up paying the money over time, either with a higher interest rate or bigger mortgage principal. Either way, your monthly payments will be higher than if you had gone with a regular refinance.
  • You'll probably pay more in the long run. You'll either a) pay a higher interest rate, or b) pay the same rate on a larger principal. Either way, the interest adds up. If you stay in your home for a long time, you could end up paying more over the years than if you had paid closing costs upfront.
  • It may be hard to find a lender. Not all mortgage lenders offer no-closing-cost refinances, so you may have to do a little hunting to find one that will accept your application and give you the terms you want.

Getting a no-closing-cost refinance can be a good financial move for some homeowners, but don't forget to consider the tradeoffs before submitting your application.

How much will you pay in the long term? No-closing-cost refinance example

Whether you end up taking on a higher interest rate or a larger loan amount, a no-closing-cost refinance will end up being more expensive in the long run, especially if you plan on staying in the home for a long time. Let's do the math to see how much one of these refinances could end up costing you.

Higher rate

Say you have a 30-year mortgage for $250,000 with a 6.5% rate and $10,000 in closing costs. Instead of paying those closing costs up front, you decide to take on a higher mortgage rate of 7%. 

Refinance with closing costsNo-closing-cost refinance with higher rate
Interest rate6.5%7%
Monthly payment$1,580$1,663
Total interest paid over 30 years$318,861$348,772
Total amount paid$578,861$598,722

If you were to stay in the home for the full 30 years, you'd pay nearly $30,000 more in interest on the no-closing-cost refinance than if you'd paid your costs up front. This means that you'll ultimately pay $20,000 more for your closing costs by exchanging them for a higher rate.

Remember, this is just an example. How much more expensive this option is compared to paying your closing costs up front depends on how long you plan to stay in the home and how much your lender increases your rate.

Larger loan amount

Let's look at that same $250,000 mortgage with a 6.5% rate if we were to roll the $10,000 in closing costs into the loan amount.

Refinance with closing costsno-closing-cost refinance with larger loan amount
Loan amount$250,000$260,000
Monthly payment$1,580$1,643
Total interest paid over 30 years$318,861$331,616
Total amount paid$578,861$581,615

In this example, rolling the closing costs into the loan amount will cost $12,755 more in interest compared to paying your closing costs up front. This means that overall, rolling your costs into your loan amount would make those closing costs $2,755 more expensive than paying them up front.

No-closing-cost refinance FAQs

Is there a way to avoid closing costs when refinancing?

To avoid closing costs when refinancing your mortgage, you'll need to get a no-closing-cost refinance, which means you'll either to take on a higher interest rate or add your closing costs to your loan balance.

Is there really such a thing as a no-cost refinance?

There's no such thing as a refinance with zero costs to the borrower. No-closing-cost refinances are a bit of a misnomer, because you will pay closing costs, you're just spreading them out over the loan term rather than paying them up front.

Can you negotiate no closing costs?

You may be able to negotiate certain fees with your lender, such as if they charge an application fee. But lenders charge fees to pay for the work they do originating your loan, so you won't be able to avoid all all these fees or negotiate to pay no closing costs.

Is it cheaper to refinance with my current lender?

It might be cheaper to refinance with your current mortgage lender, especially if it offers discounts on rates or fees for existing customers. But you should still shop around and get quotes from multiple lenders to make sure you get the best deal.

Read the original article on Business Insider

2023-05-22T19:46:02Z dg43tfdfdgfd