7 min read Aug 09, 2024

No Closing Cost Refinance: What Is It & How Much Can You Save?

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Edited By

Prayas Biswas

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Editor
Edited By

Prayas Biswas

Editor, Houzeo
About

Prayas B. is a detail-oriented content editor specializing in American real estate. In his free time, he enjoys hitting the pitch for a game of football or watching motorsports.

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✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home buyers.

$4,345 is the average refinance closing cost in 2024. This means you pay around 2% to 5% of the new mortgage as the closing cost.

Closing costs typically include an origination, appraisal, and credit report fee. A no closing cost refinance can help you save on these expenses. However, it may result in a slightly higher interest rate or an increased mortgage principal.

Compare interest rates, loan terms, and fees from different lenders to find the best deal. If you’re looking for a refinance, Houzeo can help.

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What Is a No Closing Cost Refinance?

A no closing fee refinance is a mortgage option that replaces your current mortgage with a new one without upfront closing costs. Usually, lenders waive these costs by incorporating them into the new loan in other ways.

Lenders might raise the interest rate on the new loan principal to cover the closing costs. Alternatively, they may increase the mortgage principal to offset the waived amount.

How to Qualify for a No Closing Cost Refinance?

To qualify for a no closing cost refinance, ensure you have:

  • A Good Credit Score: Lenders need a score above 300. It’s an optimal number to qualify for the refinance.
  • A Stable Income History: Ensure you have a steady income history over the past 2 years. It shows you are financially stable, and will be able to repay the mortgage.
  • Sufficient Home Equity: You must have at least 20% equity in your home.
  • Essential Documents: Gather financial documents like tax returns, bank statements, and proof of homeowner’s insurance.
  • Lower Debt-To-Income Ratio (DTI): You should have less than 36% Debt-To-Income Ratio to qualify for the refinance.

How Does No Closing Cost Refinance Work?

If you opt for a zero closing cost refinance, the lender will offer you two refinancing options

  1. Lender-Paid Closing Costs: The lender will cover the closing costs. In return, they will charge you a higher interest rate on the loan.

    For example – Consider that you have a 4.5% interest rate on a $200,000 mortgage, and refinance to a new $200,000 loan at a 3.5% interest rate. Also, assume the closing costs are $5,000. The lender will give you the new mortgage at 3.75% interest rate instead of 3.5%. This will help them cover the closing costs.
  2. Roll Out Costs Into the Loan: Lenders add the closing costs to the new loan principal amount. This means you pay a higher mortgage over the life of the loan term.

    For example – You refinance to a new mortgage of $200,000 with a closing cost of $5,000. Your new loan amount becomes $205,000.

Potential Costs and Savings

Suppose you have a 30-year fixed-rate mortgage on $200,000. With no closing costs, you save approximately $4,000 to $10,000 on the mortgage. The table illustrates the key differences between a traditional refinance and a no closing cost refinance.

ParametersTraditional RefinanceNo Closing Cost RefinanceDifference
Interest Rate3.5%4%0.5%
Total Interest Over
30 years
$1,27,000$1,43,000$16,000

You pay around $16,000 ((4% of $200,000)- (3.5% of $200,000)) more over 30 years with a no closing cost refinance program.

Pros and Cons of No Closing Cost Refinance

With no closing costs upfront you lose out on the long run but save in the short term. So see if it is the right financial move for you.

✅ Pros

  • No Upfront Payment: This refinance option helps you save thousands of dollars upfront. You can utilize the saved cash for other projects such as home renovation or a car loan repayment.
  • Simplified Process: A no closing cost refinance streamlines the refinancing process. It helps to quickly finalize the loan without the need for immediate out-of-pocket expenses.

❌ Cons

  • Higher Costs Over Time: Due to a higher interest rate or increased principal amount, you may pay more over the life of the mortgage.
  • Increased Monthly Payments: If the closing costs are added to the loan, your monthly mortgage payments may be higher.

Tips to Choose the Best Offer

To choose the best no-closing-fee refinance option:

  • Compare Interest Rates: Evaluate interest rates from multiple lenders. Choose the one that would offer you the lowest interest rate over the mortgage term.
  • Review the Terms: Ensure you’re aware of the terms and conditions of each offer. Check if the lender would charge any hidden/extra fees on the mortgage.
  • Assess Your Financial Situation: Ensure you have good financial health, and that it allows you to repay the new loan. You should have a good credit score, a stable income, and a manageable debt-to-income ratio.
  • Seek a Financial Advisor: Consult a financial advisor who can help you understand the implications of different refinancing options.

Steps to Apply for a No Closing Cost Refinance

Follow these steps to apply for a refinance with no closing costs.

  1. Research Lenders: Look for lenders who provide no closing cost refinance options. Compare their interest rates, loan terms, and potential hidden fees. Check customer reviews and ratings to choose a reputable lender.

2. Gather Necessary Documents: Gather financial documents such as recent salary slips, bank statements, and tax returns. Ensure you have proof of homeowners insurance and other important documents ready.

3. Submit Your Application: Fill out the lender’s refinance application form and submit all the required documents. Wait until the lender approves your application.

4. Review the Loan Estimate: When your application is approved, you will receive a Loan Estimate form. It outlines the interest rates, loan terms, monthly payments, and closing costs. Review and understand how the closing cost is covered in other form.

5. Maintain Your Home: The lender will arrange for a property appraisal to determine the current market value of your home. Therefore, ensure your home is in good condition to avoid any pitfalls.

6. Review the Closing Form: If the lender approves your refinance application, they will provide you a Closing Disclosure form. Review all the terms and conditions to ensure they align with the agreed-upon terms.

7. Sign the Financial Documents: Finally, sign all the legal documents at the closing meeting. This will complete your refinance application.

Is No Closing Cost Refinance Right for You?

A no closing cost refinance can be beneficial if you plan to refinance or sell your home soon. It also frees up cash for expenses like home renovations. While it might come with a higher interest rate, the short-term financial impact will be minimal.

If you plan to stay in your home long-term, the monthly payments could result in greater overall costs. To avoid this, choose a lender that best fits your financial needs. Houzeo can help you do exactly that through its list of mortgage lenders near you.

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Frequently Asked Questions

What is refinancing a home?

When you refinance your home it means you replace your existing mortgage with a new one. You usually do it to lower interest rate, reduce monthly payments, switch to a fixed-rate mortgage, or access home equity.

How much does refinancing cost?

A mortgage refinancing may cost between 2% to 5% of the total loan amount. It includes several fees such as Application Fee, Origination Fee, Appraisal Fee, Title Search and Insurance, etc.

Can you refinance without closing costs?

Yes, you can refinance without closing costs by choosing no closing cost refinancing option. In this type of refinance the lender covers the upfront costs.

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