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. That’s a huge sum to pay up front, especially when you are trying to save money. 

With a no-cost refinance, however, that amount will either become part of the loan or be recovered through a higher interest rate. Either way, you won’t have to come up with that cash up front. The downside is that paying interest on your closing costs for 30 years or accepting a higher interest rate on your entire loan can be costly. 

How a no-cost refinance works

There are two primary ways lenders structure a no-cost refinance. 

First, the lender may offer a slightly higher interest rate. In exchange for that higher rate, they provide a credit that covers some or all of your closing costs. Over time, you will pay more in interest, which offsets what the lender credited you up front. 

The more common approach involves adding the closing costs to your loan principal. Imagine your closing costs would be $10,000. Instead of paying it up front, that amount gets added to your new mortgage balance. Your monthly payment may be slightly higher because you are borrowing more money. 

The key difference between these approaches lies in the long-term math. A higher rate increases the amount of interest you pay over the life of the loan. Rolling the costs into the balance increases the amount you owe. 

If you use the second approach, you can pay extra toward the principle to pay off the difference. That way, you aren’t paying interest on the closing costs long-term. 

The terms you are offered are heavily influenced by your credit profile. Therefore, you need a strong credit history and a respectable score to qualify for favorable terms. If you’re considering refinancing in the future, strengthening your credit beforehand can improve your options. 

Tools like Kikoff can be a great fit for your financial plan. Kikoff helps you build positive payment history through reported monthly activity. You don’t need a hard credit check to sign up. Over time, consistent on-time payments can boost your credit profile, which may open the door for better refinancing terms later. 

What closing costs are typically included

Even in a no-cost structure, you’ll be subject to the same standard refinance fees. The difference is who pays them up front. Common closing costs include:

• Loan origination fees
• Appraisal fees
• Title search and title insurance
• Credit report fees
• Recording fees
• Underwriting fees
• Attorney or settlement fees (depending on the state)

In some cases, prepaid items like property taxes and homeowners’ insurance may also be collected at closing. Carefully review the loan estimate your lender provides and address any concerns up front. Pay close attention to how the new interest rate and APR compare to what you are paying currently. The goal is to save money long-term. 

When to pursue or avoid a no-cost closing refinance

You may want to pursue a no-cost closing refinance if:

• You don’t have cash on hand for closing costs
• You will save a significant amount of money in interest
• You want to keep more money on hand

However, a no-cost closing refinance may not be a good fit if you plan to stay in the home long term or the interest rate change will significantly increase your lifetime costs. Your credit profile also matters. If your credit score is on the lower side, you may receive less competitive refinance offers. 

Conclusion

Are you ready to explore your refinancing options? Before you do, team up with Kikoff to add positive payment history to your credit report and boost your score. Kikoff offers verified rent reporting, free dispute tools, and much more.

Take a step toward stronger credit habits with Kikoff.