If you took out a mortgage in the last year or two, you might still be reeling from the closing costs you paid — and understandably hesitant to repeat the process even if mortgage rates have fallen significantly. So, a refinance with no closing costs might be very appealing.
What Is a ‘No-Cost’ Refi?
Many mortgage lenders advertise home loan refinancing with no closing costs. There is no standard definition for a no-cost refinance. It can be:
— A home refinance with no lender fees
— A home refinance with no lender or third-party fees, including appraisal, escrow and title insurance charges
— A home refinance with no out-of-pocket costs at all, including prepaid expenses like property taxes and homeowners insurance
But you can’t expect them to work for free. So how does a lender pull off a no-cost refinance? There are two ways for lenders to create zero out-of-pocket closing costs:
— They can raise your mortgage rate (so they can absorb your closing costs) and give you a refinance loan amount equal to the payoff amount of your current mortgage. This is a no-closing-cost “rate-and-term” refinance.
— They can wrap refinancing closing costs into your new loan. This is called a “limited cash-out” refinance.
When a lender funds a mortgage with a rate that’s higher than the going rate, it will receive extra interest over time, allowing it to cover your closing costs and eventually make more than it would have with a market rate. Or it will sell that loan to investors for a higher-than-market price and use the additional money to cover your closing costs.
“With a lender-paid closing-cost mortgage, buyers can move forward into homeownership while keeping more of their cash available for life and other expenses,” says Dan Green, publisher of Homebuyer.com.
[Read: Best Mortgage Refinance Lenders.]
How Much Higher Is Your Rate for a No-Closing-Cost Mortgage?
If you’re looking to avoid refinance closing costs, you’ll want to obtain mortgage quotes from several lenders and compare the same type of no-cost loan. What costs will be covered? Lender charges? Lender and third-party charges? Or all out-of-pocket charges, including taxes and insurance?
“When you see a ‘no-closing-cost’ mortgage, remember that the costs aren’t just gone — they’re usually added into the interest rate,” says Green.
If the lender is absorbing the charges, how much higher will your rate be? You’ll have to get the exact figure from your lender, but you can estimate it. Paying one discount point — 1% of the mortgage amount — buys the rate down on a typical 30-year fixed-rate mortgage by 0.125 to 0.25 percentage point. So, if you have a $400,000 mortgage and $8,000 in closing costs like loan origination charges, appraisal fees, title insurance and escrow fees, you can expect your mortgage rate to be 0.25 to 0.5 percentage point higher.
[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]
How Does a Limited Cash-Out Refinance Work?
The limited cash-out refinance is a mortgage that’s larger than the payoff of the loan being refinanced. It’s not a true cash-out refinance because the extra money doesn’t go to the borrower. Instead, the lender uses the additional funds to cover refinancing costs. These can be lender charges, third-party fees and prepaid homeownership costs, like property taxes and insurance. If your actual closing costs end up being less than estimated, you can pocket up to $2,000 in cash out, or you can return the extra funds to the lender.
To be eligible for a limited cash-out refinance, you need enough home equity to qualify for the program you want. And if you’re not currently paying for private mortgage insurance, or PMI, make sure that rolling costs into your loan doesn’t push your loan-to-value over 80%. If that happens, the cost of PMI may very well negate any savings from refinancing.
When you roll refinancing costs into your new loan, you don’t have to pay a higher interest rate, but you do have a larger loan amount.
How Much Does a No-Closing-Cost Refinance Really Cost?
Let’s consider the $400,000 mortgage in the example above. The chart below shows how much you might end up paying for a no-cost refinance on a $400,000 home loan. But what if you don’t keep your mortgage for 30 years? Most people don’t. What if you expect to sell your home or refinance your home loan before then? This definitely changes your numbers.
To calculate the cost of refinancing for less than the full term, you multiply the monthly payment by the number of months you plan to keep the loan, add in refinancing costs and subtract the amount your balance has decreased from your loan amount. That represents the equity that you’ve gained by paying down your loan. (For a limited cash-out refinance, subtract your balance from your base loan amount — in this case $400,000 — not the amount that includes your refinance costs.) With a shorter term, the most expensive loan (no-cost rate-and-term) becomes the cheapest loan.
[SEE: Current Mortgage Refinance Rates]
The ‘No-Brainer’ Mortgage Refinance
If you’re hesitating to refinance because you’re not sure if you’ll recoup the costs or don’t know how long you’ll have your loan, look into the “no-brainer” refinance. A no-brainer refinance may be available if general interest rates have fallen a lot since you took out your mortgage, or if your qualifications have improved dramatically or your property value has skyrocketed.
Any of those factors could mean you might refinance to a better rate than the one you have, while paying no lender or third-party charges. The no-brainer loan has no break-even period, meaning you’ll start saving money right away.
“A no-cost refinance typically means the lender offers a higher-than-market rate in exchange for covering some or all the applicant’s closing costs,” says Tim Lucas, general manager at MortgageResearch.com. “This can be a great arrangement for someone who thinks rates will continue to drop, providing future refinance opportunities.
“For example, a lender quotes 6.25% with closing costs and a 6.75% no-cost refi. A homeowner with a 7.5% rate might choose the no-cost option because they still save money monthly. If rates drop again, they can refinance without losing thousands in closing costs,” Lucas says.
This no-cost refinance might not be the cheapest loan in the long run, but it is a sure thing. And if interest rates fall further, you can refinance again if you choose.
More from U.S. News
Where to Get Help With Closing Costs
What Is a Loan Origination Fee?
What’s the Break-Even Point on a Mortgage Refinance?
The True Cost of a ‘No-Cost’ Mortgage Refinance originally appeared on usnews.com
Update 10/14/25: This story was previously published at an earlier date and has been updated with new information.
