Can I Refinance My Mortgage With No Closing Costs?
Written By Ed Wallace
Nov 02, 2021
7 mins read
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No-Closing-Cost Refinancing: How To Lower Mortgage Payments
Mortgage refinancing can be a great way to lower your monthly payment rates for your home mortgage. However, this typically comes with additional closing costs, which can drive up the cost of your refinance. Fortunately, some lenders offer what's known as a no-closing cost refinance, allowing you to avoid paying closing costs upfront.
Wondering if this form of refinancing is the right choice for you? Keep reading to find out more about no-closing-cost mortgage refinance plans. We'll explain the different ways you can avoid paying those closing costs and break down the pros and cons of a no-closing-costs refinance.
What Is A No-Closing-Cost Refinance?
A no-closing-cost refinance allows you to avoid paying closing costs upfront to your lender once you obtain a new loan. This doesn't make those fees disappear completely – instead, they'll be bundled into the price of your loan. Those upfront closing costs come in the form of a higher interest rate or are added to your loan's principal.
Average Closing Costs If You Refinance
Just like the first time you took out a home loan, lenders may require you to pay some additional fees and expenses. As the homeowner, you are responsible for financing your new loan and handling these closing costs.
Here are some of the upfront closing costs and fees you might have to pay.
VA Funding Fees
If you refinance a VA loan, you have to pay back part of your new loan to the Department of Veteran Affairs. A first-time refinance comes with a VA funding fee worth 2.15% of the total value of your new loan. Subsequent refinances would require you to pay a fee worth 3.3% of the value of the loan.
You may pay your lender this optional fee and get a lower interest rate in return. Every point costs 1% of your total loan amount and reduces your interest rate by 0.25%. You may buy multiple points, but not every lender offers this option – ask your lender if this fee is available.
Appraisal fees are paid to a professional real estate appraiser, who will check the value of your property. This helps the lender check if your property's value has changed since the most recent appraisal.
To process your loan application, you will have to pay origination fees to your lenders. The average value of this fee is 1% of your loan amount.
Upon paying the closing costs, your lender might ask you to pay your first month's interest upfront. The amount of money you'll pay will depend on your interest rate. Your interest rate is influenced by different factors, including the type of loans you took out and your credit score.
Credit Report Fees
Lenders will check on your personal credit score for a no-closing-costs refinance to make sure that it hasn't dropped drastically since you first bought your house. A credit score report will have a comprehensive list of any credit accounts you may have, such as auto loans, business loans, and bills owed on credit cards.
Check the terms and conditions of your loan closely, as some lenders might pass on the fees for verifying your credit score during the closing. Depending on your lender and where your property is located, you may have to pay around $25 to $50 for a credit check.
After you purchase your home, you should receive the deed to the house. This document proves that the seller has already transferred the home's legal ownership to you. To protect you from any errors that may be in the property or homeownership records, you can get title insurance.
When you refinance your mortgage loan, you'll need to pay for a separate insurance policy on the title because refinances are considered new loans. Talk to your title insurance company if you're planning to refinance. Many companies would be happy to offer large discounts to returning clients who already have an existing policy from them.
The Drawback Of No-Closing-Cost Refinance
For those who are paying for their "forever home", a no-closing-cost refinance may not be the most cost-effective option. If you're planning to live there for a much longer period, you'll end up paying more over time because of the higher interest or principal. This will end up being more expensive than if you had opted to pay the closing costs upfront.
However, if you plan to stay in your house for just a short period, it makes financial sense to choose a no-closing-cost refinance.
Benefits Of No-Closing-Cost Refinance
Choosing a no-closing-costs refinance may help you reduce spending. No-closing-costs refinance is a great option for those who plan to stay in a house for less than 5 years. Within 5 years, that higher rate will have covered the lump sum you would have paid upfront.
Since your stay won’t be long-term, you won’t be living there long enough to end up paying a hefty amount in interest. By choosing this refinance option, you'll be able to sell your temporary home instead of paying additional amounts in interest over the life of the loan. This allows you to reduce expenses as long as you don't extend your loan term.
Plus, interest rates on mortgages are also typically lower than other types of loans, such as home equity loans. This makes refinancing a viable alternative when you need money for emergency expenses.
Other Costs Of A No-Closing-Cost Refinance
There are two different ways to get a no-closing-cost refinance from a credit union or bank. You can either increase the loan balance on the principal or get a higher interest rate for monthly payments. Not all lenders offer both of these types, so make sure the lender you choose is offering the kind of no-closing-cost refinancing you want.
Increasing Your Loan Balance
When you opt for a no-closing-cost mortgage refinance, you still have to pay fees. But instead of paying these fees upfront as a lump sum, they'll be added as higher interest over the life of the loan. This affects your loan-to-value (LTV) ratio, reducing home equity. A reduced LTV will require you to pay for private mortgage insurance, which will increase your monthly payment.
If you choose to roll in the closing costs, be sure you can cover the additional expenses. Rolling the closing costs in will increase your loan's total balance to your lender.
Choosing A Higher Interest Rate
If the lender offers a no-closing-cost refinance without adding to your balance, you will be charged a higher monthly interest rate on your payments. This won't change your principal loan amount, but it does mean that you'll pay more money over time.
If you choose a higher interest rate, the amount for your monthly payment will increase. Compare figures with your lender before you make the choice to increase your interest rate. You can also calculate the actual savings and costs of refinancing using our mortgage refinance calculator.
Other Options For Mortgage Refinance
If your current budget and credit score are not a good fit for a no-closing cost refinance, there are other ways to refinance your mortgage. Here are some options that may be better suited to your situation!
Through this option, you can refinance a new mortgage and borrow cash at the same time. This kind of refinancing allows you to roll closing costs into the amount of the loan and receive a check for the total.
Do keep in mind that it's likely your new mortgage loan amount will be slightly higher than your previous mortgage. This is because you’re not just refinancing and paying closing costs, but you’re also loaning extra money on top of it.
An FHA streamline refinance typically doesn't require a new appraisal on the home, resulting in less paperwork. This allows you to get new home loans with lower interest rates very quickly and helps you save money on your closing costs.
It's easy to refinance from one type of mortgage to a conventional mortgage. Some borrowers also opt to refinance an existing conventional mortgage to another conventional mortgage. This is because it would allow them to refinance to a shorter-term or take advantage of a lower interest rate when market conditions are right.
If you have equity in your home, can cover upfront costs, and have a good credit report, you might save a lot of money by refinancing from a 30-year mortgage to a 15-year one.
Consult Us For Advice On Mortgage Loans
A no-closing-cost refinance allows you to save money and help you repay your mortgage loans faster. However, whether this is a good option for you will depend on how long you intend to live at your house, as well as the state of your finances. It's best to sit down and compare how much your payment will be every month and determine if you can afford the different options available for your loan.
If you have more questions about how you can get better rates and cut your costs, talk to us! Wesley Mortgage, LLC has an experienced team of financial experts who can help you shop around for the right refinance option. With our advice, you can choose a home financing plan that's comfortable for your wallet!