What Is a No-Cost Closing Refinance?

If you are considering refinancing your home to cash out on some of the equity or reduce your interest rate, you have to prepare for all of the fees. While you won't have to make another down payment, you will have to cover closing costs. But what is a no-cost closing refinance, and how does it affect what you pay to refinance?

As the name suggests, it's a type of mortgage refinance where you don't pay any closing costs out of pocket. You can avoid these fees by taking on a slightly higher interest rate or financing the closing costs into your loan. 

While a no-cost closing isn't right for everyone, it can be a good option if you want to save money on interest and don't have the cash on hand to cover closing costs. 

What is a no-cost closing refinance?

A no-cost closing refinance is a mortgage refinance where you do not pay closing costs out of pocket at the time of closing. Instead, the lender will either cover the closing costs in exchange for a higher interest rate or roll those costs into your loan. In both scenarios, those costs are still there. They are simply financed differently. 

When you refinance your home the traditional way, you'll be charged closing costs for originating the new loan. These are similar to the closing costs you have to pay when taking out a new mortgage. Your closing costs are usually about 3-6% of the total loan amount. 

For example, if your loan is for $300,000, your closing costs could be anywhere from $9,000 to $18,000.

Lender credit vs. rolling costs into the loan

There are two main ways a no-cost closing refinance works:

• Lender credit: The lender covers your closing costs in exchange for a higher interest rate. You pay less now but more over time.
• Rolling costs into the loan: Your closing costs are added to your loan balance. This increases your monthly payment slightly but avoids an upfront cost.

Is a no-cost closing refinance right for you?

A no-cost closing refinance can make sense if:

• You plan to move or refinance again within a few years
• You don't have enough cash to cover closing costs upfront
• You want to lower your monthly payment without a large initial expense

If you plan to stay in your home long-term, paying closing costs upfront may save you more money over time due to the lower interest rate.

How your credit score affects refinancing

Your credit score plays a major role in the interest rate you're offered when refinancing. A higher score means a lower rate, which makes a no-cost option more attractive since the rate increase is proportionally smaller.

If you're preparing to refinance, tools like Kikoff can help you strengthen your credit before applying. Kikoff reports on-time payments to all three credit bureaus, which can improve your score and unlock better mortgage pre-approval terms.

Start building a stronger credit profile with Kikoff today!