A no-closing-cost refinance saves you money on your mortgage upfront, but you could pay more in the long run

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  • According to the Federal Reserve, closing costs typically cost 3% to 6% of your mortgage principal.
  • With a no-closing-cost refinance, you don't have to pay thousands of dollars when you close on your new mortgage.
  • Instead, you'll pay the lender by either incurring a higher interest rate or rolling the costs into your mortgage principal.
  • A no-closing-cost refinance could save you money if you plan to move soon, but you'll pay more in the long run if you stay in the home for a long time.
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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, you'll borrow the same amount, 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.

How much would you normally pay in refinancing closing costs?

Your 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:

  • Application fee
  • Origination fee
  • Appraisal fee
  • Inspection fee
  • Survey fee
  • Title search
  • Attorney fees
  • Property taxes
  • Prepayment penalties
  • Mortgage insurance

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. But you can get out of the big one-time payment with a no-closing-cost refinance. Although you will pay more each month, you may end up saving money if you sell the home in a couple years.

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 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.

Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. 

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