Refinancing is on the rise right now, with ultra-low mortgage rates tempting homeowners to apply for new loans on their balances, with a new, more affordable pricing.
Despite the lower interest rates, refinancing doesn’t always save you money right out of the gate. Closing costs are usually a factor in determining whether or not it’s worth it to refinance. After all, the cost to refinance may outweigh the potential savings from locking in a lower rate, depending on how long you plan to own the home. However, there are a few refinancing options in today’s marketplace that do not require any closing costs. Could this be a good match for your refinancing needs? Let’s explore a no closing cost refinance scenario to find out.
How No Closing Cost Refinances Work
As the name suggests, a no closing cost refinance is a type of mortgage in which you are refinancing the balance you currently owe on your home loan, without having to pay any fees at the closing table. However, this does not mean you don’t pay the closing costs–you just don’t pay them at closing. The fees normally associated with closing costs generally get added on to your principal balance, or they are exchanged for a higher interest rate. In both cases, the homeowner is still paying those fees–just not up front. This can be a good solution for homeowners who are cash poor but have substantial equity in their homes.
In the first scenario, the lender tacks on the closing costs to your new mortgage amount.
Here’s an example: You refinance your mortgage for $150,000. The closing costs come to $5,000. Instead of paying the $5,000 at closing, your lender adds it to your new mortgage balance, bringing the full amount financed to $155,000. This typically makes your monthly payments higher, or it may take you longer to pay the loan off, but does not affect your interest rate.
In the second scenario, the lender doesn’t add the $5,000 to your new mortgage. Instead, they simply charge you a higher interest rate. For example, if your rate on a traditional refinance would have been something like 2.98%, your lender may charge you 3.50% for a no closing cost refinance. (Please note, these figures are purely for illustrative purposes.)
If your current interest rate is 4.00%, that’s not a bad deal. You’ll be saving money on interest and most likely getting a lower monthly payment. However, if your current interest rate is 3.50% or lower, the no closing cost refinance isn’t doing you any favors.
Who Benefits Most from No Closing Cost Refinancing?
Like almost every mortgage option out there, the no closing cost refinance isn’t for everyone. However, it can be a great solution for certain homeowners.
When you’re thinking about refinancing your mortgage, the most important thing to look at is the breakeven point. This is the point in time where the savings from your refinance begin to outweigh the cost. For some homeowners, that point may be after 2 years, for others, it may be more like 7, 8, 10…etc. The breakeven point can vary dramatically from homeowner to homeowner, because each loan scenario is different.
Homeowners who plan on staying in their homes a long time may not benefit as much from a no closing cost refinance, especially if the lender charges them a higher interest rate in exchange for no closing costs upfront. A higher interest rate usually means you’ll be paying more over the longterm.
By contrast, homeowners who want to refinance and don’t plan on owning the home forever, or those whose breakeven points will come sooner rather than later, will benefit considerably more from a no closing cost refinance. If you can refinance your mortgage without having to shell out a bunch of cash at closing and start to reap the savings in as little as a few years, then this could be the refinancing plan for you.
How Much Are Closing Costs on a Refinance?
There’s no one-size-fits-all answer to this question. Closing costs can include appraisal fees, title insurance, credit report fees, paying points, etc.
The amount of the closing costs usually depends on several factors, including:
- The amount that’s being financed (loan origination fees average around 1% of the loan amount)
- The area in which you live and the companies with which you are doing business (appraisal fees can range from around $300-$500+ and credit reporting fees can be in the ballpark of $25-$50)
- Whether or not the loan is a government-insured product like a VA loan (the VA typically charges a 2.15%-3.30% funding fee for refinancing)
- Whether or not you choose to pay points (an option for the homeowner to pay 1% of the loan amount per point, which essentially buys down their interest rate.)
- Whether or not you are required to pay prepaid interest (when the lender asks for the first month’s interest upfront)
Where to Get More Info
It’s always a good idea to speak with a financial advisor before applying for a mortgage refinance. You can also reach out to our team of loan professionals to receive additional information and get a personalized rate quote, absolutely free.
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