A mortgage refinance offers plenty of flexibility, but closing costs are a major deterrent. These costs can add up to 2% to 6% of your new mortgage’s balance. It’s no wonder people want to avoid these upfront costs. Luckily, it’s possible to do a no closing cost refinance. This guide will explore how no closing cost refinancing works and the pros and cons to consider before getting started.
Understanding Refinance Closing Costs and Fees
Refinancing closing costs and fees can add up in a hurry. That’s why many people look for ways to avoid them or minimize their impact. These are some of the expenses you can expect to incur.
What Fees Are Involved During Refinance Closing?
Closing costs represent the fees you incur throughout the application process. Origination fees, appraisal fees, attorney fees, and title insurance fees are some of the items that contribute to closing costs. You may also have to cover an early repayment penalty fee with your current mortgage lender.
Is It Possible to Refinance Without Closing Costs?
You can refinance a mortgage without paying closing costs. It’s possible to absorb these costs into your new mortgage with a no closing cost refinance.
What is a No Closing Cost Refinance?
A no closing cost refinance is a financial product that lets you modify your existing mortgage without paying closing costs. Mortgage lenders can decide how to adjust your mortgage instead of closing costs, such as giving you a higher interest rate.
How Does a No Closing Cost Refinance Work?
No closing cost refinances allow you to defer closing costs instead of paying them right away. These loans offer immediate financial relief since you don’t have a big expense. However, these loans are more expensive in the long run since interest will accumulate on your mortgage balance at a faster rate.
How Lenders Offset Closing Costs
Most lenders charge higher interest rates to compensate for no closing costs. Lenders still need to make up the money from closing costs, and interest accumulation is the common method. Some lenders may let you tack closing costs onto the backend of your loan.
The Benefits of No Closing Cost Refinance
No closing cost refinances offer several benefits. These are some of the perks to consider.
Immediate Savings and Cash Flow
You can save thousands of dollars by deferring your closing costs. These savings improve cash flow for rental properties and offer general savings for consumers.
Easier to Qualify for a Loan
A no closing cost loan can be easier to obtain since lenders will have less doubt about your ability to make on-time payments. Closing costs can deplete some homeowners’ savings accounts and make it more difficult to stay on top of monthly payments. No closing cost loans let you keep more money in your pocket, which makes it easier to get approved for a loan.
Simplified Budget Management
It’s easier to make monthly mortgage payments than it is to save up a lot of money for closing costs. No closing cost refinances make the incurred fees more manageable in the long run.
Drawbacks of No Closing Cost Refinance
Although no closing cost refinances have several upsides, these financial products have a few disadvantages to keep in mind.
Higher Interest Rates over Time
No closing cost loans have higher interest rates, which will increase your monthly mortgage payments. You will have to contend with elevated payments for your mortgage’s duration, which can be as long as 30 years.
Potentially Higher Monthly Payments
Closing costs get added to your loan as higher interest rates. Higher monthly mortgage payments will impact your budget in the long run. While saving enough money to pay closing costs upfront can take a while, you will have more room in your budget in the long run.
Calculating the True Cost
While no closing cost refinances offer immediate relief, the true cost can comfortably exceed the original closing costs. That’s because interest will compound at a faster rate on your new mortgage. You will save money in the long run if you pay closing costs upfront instead of taking out a no closing cost mortgage.
How Can You Qualify for a No Closing Cost Refinance?
Mortgage lenders will review your FICO score, debt-to-income ratio, and financials to determine if you qualify for a no closing cost refinance. The requirements vary for each lender and also depend on which type of refinance you want. Government-funded refinances like VA, USDA, and FHA loans have more generous eligibility requirements than conventional mortgages. A 620 FICO score and a debt-to-income ratio under 41% will help you qualify for most types of mortgages.
Different Types of No Closing Cost Refinance Options
Homeowners can choose from a few no closing cost refinance options. These are the choices.
Rate-and-Term Refinance
A rate-and-term refinance allows you to adjust the rate and term of your current mortgage. Some homeowners use these loans to capitalize on lower interest rates, while others extend their loan’s duration to minimize monthly payments. It’s also possible to receive a loan with a shorter term so you can get out of debt sooner, but this route involves higher monthly payments.
Streamline Refinance Programs
You can adjust the rate and terms of VA, FHA, and USDA loans with streamline refinance programs. You must have an existing VA, FHA, or USDA loan to use this option. These refinance programs do not require home appraisals.
Cash-Out Refinance
Homeowners build equity with monthly mortgage payments and appreciation. A cash-out refinance lets you tap into the equity you have built and use it for any expense. Some homeowners extend their loan terms while taking out equity to keep their monthly payments similar to current levels.
Comparing No Closing Cost Refinance with Traditional Refinance
A no closing cost refinance is similar to a traditional refinance. The key difference is the closing costs. No closing cost refinances are more affordable in the short run but are more expensive in the long run. Traditional refinances are more expensive in the present, but you will end up with monthly mortgage payments. Homeowners and real estate investors should assess how much they value having lower monthly mortgage payments compared to deferring closing costs.
How to Choose the Right Lender for No Closing Cost Refinance
Homeowners should compare several lenders before deciding on the right no closing cost refinance for them. These are some factors you should consider when assessing mortgage lenders:
- Rates and terms
- Fees
- Online reviews
- Customer support
- Other financial products that the lender offers
Is a No Closing Cost Refinance Right for You?
A no closing cost refinance can make it easier to refinance since you don’t have to save money for closing costs. You also won’t have to drain your emergency savings, as you never know when a surprise expense may require your immediate attention.
However, these financial products will increase your monthly payments. Lenders will tack on your closing costs at the end of the mortgage or opt to give you a higher interest rate. You’ll save money in the long run if you pay closing costs upfront, but it isn’t possible for everyone to make those payments right away. Homeowners should assess their financial situation before deciding which type of refinance to get.
FAQ About No Closing Cost Refinance
You can’t refinance for free because of the fees incurred throughout the process. Labor must be paid for, and lenders let you choose between paying closing costs now or deferring them.
You will save money if you pay closing costs out of pocket when refinancing. However, it’s not practical for everyone to make that decision.
You can negotiate lower fees and end up with a no closing cost refinance. However, savings will get tacked onto your loan’s balance or result in a higher interest rate.
No closing cost refinances do not have any hidden fees. You’ll have to pay the same fees as a traditional refinance, but no closing cost refinances are more expensive in the long run.
