How a 'no closing costs' refinance works

no closing cost mortgage means the charges are folded into your loan balance
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Don't let the name fool you. Even though it's called a "no closing costs" mortgage, you still have to pay closing costs, just not upfront in a lump sum.

Instead, you'll have two ways to dispose of the various fees.

  1. By adding them to your loan amount. If your refi loan is in the amount of $200,000 and closing costs are $6,000, you'll actually borrow $206,000.

  2. By accepting a higher interest rate on your loan. Your lender may cover your closing costs if you agree to pay a higher mortgage rate. On that same $200,000 loan, a lender offering you a 30-year fixed-rate mortgage at 3% may waive the fees if you'll take a 3.5% rate instead.

The advantages of a 'no closing costs' refinance

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The big plus with avoiding closing costs is that you might get yourself into a new mortgage without delay, even if — in today's COVID-19 economy — it would be hard for you to scrape together the cash to pay the fees at closing.

Low rates are still out there, but you may have to shop around to find them. One of America's largest home lenders, United Wholesale Mortgage, continues to advertise a 30-year fixed-rate mortgage available for refinances with rates starting at 1.999%.

A homeowner who's able to hook a low rate shouldn't focus too much on closing costs, says Grant Moon, CEO and founder of the mortgage fintech firm Home Captain.

"Instead, borrowers should consider how much money they’ll save refinancing," Moon says.

And the savings can be considerable. At current mortgage rates, an estimated 19.4 million U.S. homeowners could refinance and cut their monthly mortgage payments by an average $308, according to the mortgage technology and data provider Black Knight.

If you'll need a no-closing-costs loan to achieve those kinds of refinance savings, many lenders offer you that choice. If you happen to land on a lender who doesn't, just keep shopping around.

The disadvantages of a 'no closing costs' refinance

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The big drawback to a "zero closing costs" mortgage is that you stretch out paying off the closing costs for years — and can end up paying a high price for the privilege.

Here's how that happens with the two options listed earlier:

  1. Adding in the closing costs: Let's say you're reeling in a 30-year refi loan at 3%. If you borrow $200,000, your lifetime interest will total $103,601. If you borrow $206,000, with the closing costs rolled in, your interest over time will add up to about $106,774 — $3,173 more. Your $6,000 in closing costs will wind up costing you nearly $9,200.

  2. Trading closing costs for a higher rate: Again, a $200,000, 30-year refi at 3% will cost you $103,601 in interest over time. The same loan at 3.5%, with closing costs baked into the rate, will cost you $123,337 in lifetime interest — $19,736 more. Your $6,000 in closing costs will wind up costing you nearly $26,000.

That math makes going with a no-closing-costs loan a "dumb decision," says David Demming, a financial adviser in Aurora, Ohio. He tells LendingTree it makes sense only if you don't plan to stay in the home over the long haul.

Ultimately, it's a personal decision, says Danny Frio, branch manager at Preferred Rate in Oakbrook Terrace, Illinois.

"It depends on the cost, and the duration of time the client plans to live in the home and keep this new loan," Frio says. "We do an analysis on each client ... and then give the client our opinion, and then see what they prefer since they are the ultimate boss."

The first step for a would-be refinancer is to grab an ultra-low mortgage rate while you still can. There'll be plenty of time later to think about the closing costs and how you'll pay them.

A couple of final points to consider: Some of the fees charged at closing may be negotiable, or you may be able to offset some of the costs by finding savings elsewhere — like by comparison shopping for your homeowners insurance.

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About the Author

Doug Whiteman

Doug Whiteman


Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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