Can I Refinance My Mortgage with No Closing Costs?

When you consider applying for a mortgage, closing costs are among the fees that enter into the equation. However, you might be less familiar with the specifics of a refinance.

In this case, you can expect to pay 2 percent to 5 percent of your loan amount. However, it’s possible to roll up these expenses into your new loan with a no-closing-cost refinance.

Understanding a No-Closing-Cost Refinance

A no-closing-cost refinance is a loan product that means you don’t have to pay closing costs upfront to get a loan. In a typical refinance scenario, a borrower pays a lump sum at closing to cover ancillary costs. On the other hand, with a no-closing cost refinance, you can figure these fees into the loan or pay a higher interest rate on the same principal balance.

How Does a No-Closing-Cost Refinance Work?

As the name implies, no-closing-cost refinancing eliminates closing costs. However, there are trade-offs. You should account for a higher interest rate, which can cost you more over the course of the full life of the mortgage. A no-closing-cost refinance may also include the fees in the financing. In effect, this means that instead of charging you upfront, the fees would be spread over the term of the loan.

What are Refinance Closing Costs?

As stated above, closing costs are generally 2 percent to 5 percent of the loan’s principal balance. They vary from state to state, however. According to data released in 2021, the average closing costs for a refinance were $3,398, including taxes, and $2,287, excluding taxes, according to ClosingCorp’s 2021 national refinance closing cost report.

In addition to an application fee — which some lenders charge and others don’t require — common closing costs include:

Appraisal fee: This reflects the cost of a professional appraiser to inspect the home to determine its value before the lender extends a mortgage offer. A typical, single-family home appraisal will range from $300 to $450, though that can vary depending on several factors including the size, value and condition of the property as well as the level of detail required.

Credit check: It’s commonplace for lenders to charge a fee to pull your credit report to evaluate whether you’re a qualified borrower. This can cost $25 or more per borrower.

Origination fee: Some lenders charge a fee to initiate the loan, which typically amounts to around 1 percent of the total loan.

Title search: A lender will look up the property record for the title of the home to ensure there are no issues with property ownership or liens. This can cost between $400 and $700.

Mortgage insurance: Most FHA loans include an upfront mortgage insurance premium — typically 1.75 percent of the loan amount.

Credit report fee: Most lenders will want to run a credit check on you before extending an offer, to ensure your credit score has not dropped significantly since you initially purchased the home. Expect to pay $10 to $100 per credit report for each person who has applied for the loan.

Running the Numbers

It’s important to figure out how long you plan to stay in the property and what your breakeven timeline on your potential closing costs might be.

You might be wondering if a no-closing-cost mortgage makes sense for you and your situation. Let’s consider a few scenarios. If you want your lender to roll the closing costs into the new loan, you need to make sure that your total payments (principal and interest) amount to less than what they would have been had you paid the closing costs upfront. This can be a toss-up.

Another consideration: Rolling your closing costs into your new mortgage may also negatively impact your loan-to-value (LTV) ratio. This could reduce your home equity to the point where you are now required to pay private mortgage insurance (PMI). Your monthly payment would be higher.

How to be a Smart Consumer

There may be other ways to save on the cost of a refinance. For instance, some lenders will waive the appraisal fee for current borrowers who have significant equity in their homes. You don’t know unless you ask! Second, don’t be afraid to use your loyalty as leverage. If you’re applying with a bank where you already have a relationship, ask if they will consider forgoing the application fee. Many lenders are happy to extend such a benefit to their customers a way to stay competitive.

Another strategy is to improve your credit score. A higher credit score might enable you to obtain more favorable lending terms than someone with a lower credit score. This might mean the ability to qualify for reduced fees, such as a lower loan origination fee. (The origination fee usually ranges from 0.5% to 1.5% of the loan principal.)

Also, don’t be afraid to shop around. Get quotes from multiple mortgage lenders, and make sure to compare all the different terms — ensuring you’re looking at apples to apples. Go with the lender that offers the best total package.

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

A no-closing-cost refinance can be a great option for people who are not planning to stay in their property for more than a few years. If you are planning to stay in the home for the long term, a no-closing-cost refinance doesn’t end up making financial sense.

The right decision for you depends on your financial health and current housing situation. Knowing your limits and understanding all of your options can help you make the right decision when you're ready to refinance.

How to Apply

Interested in learning your options for a no-closing-cost refinance? You can start by visiting a Ruoff branch or applying online. Either way, you can expect to follow certain steps. First, expect to answer a lot of questions, via a loan application. Your lender and underwriting team will be interested in your current and former housing situation, employment status, income, assets, and credit history.

In this situation, your loan officer will also ask about the condition of your home and may request an updated appraisal. (Some refinance loans do not require an appraisal). If the real estate market in your area has appreciated and you have equity, you may be approved based on your home’s assumed value.

You will be asked to provide supporting documents that back up the claims you make up the application. Different loan products have different specifications. Once approved, you can choose if and when to lock in your interest rate. A closing date will be scheduled, giving you enough time to gather any documents. Plus, this gives the lender enough time to verify the information before the final approval is granted.

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