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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.
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:
Either way, a no-closing-cost refinance means foregoing a large payment upfront in exchange for paying off the costs over time.
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.
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.
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.
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 costs||No-closing-cost refinance with higher rate|
|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.
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 costs||no-closing-cost refinance with larger loan amount|
|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.
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.
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.
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.
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.