How Does a No-Closing-Cost Refinance Work?


Are you considering refinancing your mortgage but hesitant about the high cost of closing? A no-closing-cost refinance may be the solution for you.

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In this article, we’ll explain what a no-closing-cost refinance is, how it works, and the benefits and drawbacks of this type of refinance. We’ll also go over the qualifications and the process of getting a no-closing-cost refinance, so you can decide if it’s the right choice for you.

What is a no-closing-cost refinance?

In short, it’s a mortgage loan that offers homeowners the option to refinance their mortgage without having to pay initial fees to lenders.

Closing costs usually pay for lender fees as well as loan origination fees, third-party expenditures, appraisal fees, and underwriting and processing costs. Refinance lenders also take on costs that originate from third parties, including escrow and title costs.

With a no-closing-cost refinance, you potentially save money on closing costs, lower your monthly mortgage payments, and build equity in your home faster.

It’s certainly tempting and may be the right choice for certain types of borrowers. However, those closing costs saved are costs added to the loan amount that you’ll eventually have to pay back.

How does a no-closing-cost refinance work?

The application process for a no-closing-cost refinance is similar to that of a traditional refinance. You’ll need to provide financial information and documentation to the lender and they will run a credit check. Once the mortgage lender approves your application, the refinance process can begin.

You may be wondering how the lender makes money on a no-closing-cost refinance. The lender recoups their costs by charging a slightly higher interest rate on the loan. This way, they can potentially make more money in the long run, even though you don’t pay any closing costs up front.

Pros and Cons of No Closing Costs

Having no upfront closing costs comes with a range of both advantages and disadvantages. The idea of skipping the closing costs and fees upfront may be appealing, or even right for you.

However, it’s still important to take into account the various ways it may affect your financial situation next month, next year, and next decade. Here are some pros and cons:


  • You won’t have to pay any closing costs upfront
  • Can lower your monthly payments
  • Helps you build equity in your home faster


  • Lender charges a slightly higher interest rate
  • May end up paying more in interest over the life of the loan
  • May not be the best option for everyone. Be sure to compare the overall costs of a no-closing-cost refinance versus a traditional refinance with closing costs included.

Qualifying for a No-Closing-Cost Refinance

When it comes to qualifying for a no-closing-cost refinance, the eligibility requirements are similar to those of a traditional refinance. Your lender will look at your credit score, income, and debt-to-income ratio to determine if you qualify.

To improve your chances of being approved for a no-closing-cost refinance, it’s a good idea to make sure your credit score is as high as possible. You should also have a solid income and low debt-to-income ratio. Additionally, having a good track record of paying your bills on time can also help.

Once you have determined that you are eligible for a no-closing-cost refinance, you need to compare different options to determine which one will be the most cost-effective for you in the long run. Be sure to consider the interest rate, fees, and overall costs of each option before making a decision.

Read the Fine Print

Before you get excited about not paying anything upfront, sit down with your lender to discuss all the details. Be sure to keep an eye out for the following details:

  • Some loans are not actually “no cost”
  • Some loans solely cover lender fees, while others may cover all expenses including third-party costs
  • Home loans differ from lender to lender, so it’s important to shop around
  • Lenders may pay different interest rates and costs on your behalf. Find out all the details before you commit.
  • Consider all the costs: title and appraisal, lender fees, escrow, home inspections, mortgage points and other third-party fees

Is a no-closing-cost refinance right for you?

Consider how it will affect your financial status, both now and in the years to come. For example, it may require zero, or close to zero, fees at the time of signing but will raise your mortgage rate over time.

Right off the bat, added expenses over the years may not sound great. However, if you intend to move within the next few years, taking on low-to-no costs upfront may offset the savings if you kept mortgage rates low over the life of the loan. If you’re not going to be in your current home for long, it may make sense to save now and spend a bit more over the next year or two.

In contrast, if you’re 10 years into a 30-year mortgage, it may be tempting to skip paying fees at the time of signing. However, it may not be worth it to sign up for a no-closing-cost refinance. Fees and interest continue to accrue and will continue to do so each month until the loan has been paid in full.

Sit down and do the math to see what costs and benefits will add up to over the years. Be sure to shop around to make sure you’re getting the best deal, regardless of whether you decide to select a loan with no closing costs upfront.

Remember, while the loan may not cost anything at first, nothing comes for free. Eventually, you’ll have to pay for the fees you skipped at the time of signing, and that will show in your monthly mortgage bill.

What does a “no-closing-cost mortgage” really look like?

Now that you understand the positives and negatives of selecting a no-closing-cost refinance, here’s an example of how these loans may play out in a lending setting:

For example, you may be charged $4,500 in closing costs, the average cost for homeowners today. If you choose to pay this out of pocket, the $4,500 cost will remain static as a one-time charge.

On the other hand, if you skip those fees, that sum will be rolled into your mortgage bills each month over the duration of that loan. Over 30 years at 4.125% interest, the borrower will eventually pay a total of $7,851.

Meanwhile, over the course of five years, the borrower will wind up paying $6,000 after initially skipping the $4,500 closing fee.

Whether this is worth it or not is entirely up to you. If you’re planning to sell your home within the next couple of years, the immediate savings may be worth it for you to pay a bit more over two years.

You can take that saved money to invest in repairs, remodels, realtor fees, and other associated costs that accompany selling a home. Moving a home quickly on and off the market can save you other costs that make this type of loan right for you.

What are the warning signs of a bad deal?

No-closing-cost loans are each different from one lender to another. By seeking different opinions and home equity options, you can ensure that you’re getting a good deal. Here are a few warning signs to look out for:

  • The loan is called “no cost” but it turns out you’ll have to pay for appraisals, title fees, escrow, property taxes, insurance, and prepaid interest.
  • The loan is called a “no lenders fee loan,” which means the bank will only cover just that—lenders fees, and nothing else.
  • Carrying out a refinance through a mortgage broker, who then adds on a lender credit, further increases your interest rate.
  • A bank uses “bundles” that tack on closing costs on top of the cost of the loan. These bundles further increase the size of the loan, as well as the interest rate, leading to a higher monthly payment over time.

Be aware of potential red flags and take your time when considering any type of home loan. This is especially true if the terms of the loan are unclear and you are feeling pressured to make a decision before fully understanding the details of the loan. It’s always better to be cautious and well-informed before making a commitment.

Should you negotiate?

Yes! Everything is up for negotiation, and that includes applying for a no-closing-cost refinance. Do your research to find the lowest costs at the most responsible rate you can.

Present your lender with research that shows you’re knowledgeable and that you’ve done your homework. Then don’t be afraid to negotiate.

If you plan to stay in your current home for the next 30 years or are hoping to relocate in the upcoming years, it’s your home and your financial future. Take charge and only enter a lending situation when you’re fully comfortable with the terms and outcomes.

No-Closing-Cost Refinance FAQs

What are the average closing costs for a refinance?

The average closing costs for a refinance can vary depending on the location, property type, and loan type. Typically, closing costs for a refinance can range from 2% to 5% of the loan amount.

For example, on a $200,000 loan, the closing costs can be anywhere from $4,000 to $10,000. These costs include the loan origination fee, appraisal fee, title search and insurance, and other miscellaneous fees.

Can you negotiate closing costs on a refinance?

Yes, it is possible to negotiate closing costs on a refinance. While some costs, such as the appraisal fee or title search, are set by third-party providers and cannot be negotiated, other costs such as the origination fee or lender’s title insurance can be negotiated with your lender.

Here are a few strategies to negotiate closing costs on a refinance:

  • Shop around: Compare offers from multiple lenders and negotiate with them to see if they can lower or waive certain fees.
  • Timing: Closing costs tend to be lower during slow periods for the housing market.
  • Ask for a credit: Some lenders may offer a credit towards closing costs in exchange for a slightly higher interest rate.
  • Be prepared to walk away: If a lender is not willing to negotiate closing costs, it may be best to look for another lender that is more willing to work with you.

When would a no-closing-cost refinance be a bad idea?

A no-closing-cost refinance may not be the best idea in certain situations. Here are a few reasons why a no-closing-cost refinance may not be a good idea:

  • Short-term ownership: If you don’t plan to keep your home for a long time, you may not be in the house long enough to recoup the costs of the refinance.
  • Not enough equity: If you don’t have enough equity in your home, you may not be able to qualify for a no-closing-cost refinance.
  • Higher interest rate: If the interest rate is higher than the rate you already have, it typically does not make sense to refinance.
  • Limited budget: if you’re tight on budget, and the higher interest rate on the no-closing-cost refinance will put you in a difficult financial situation, then it’s not a good idea.
Anne Bouleanu
Meet the author

Anne Bouleanu is a freelance journalist based in Chicago. She has worked with outlets including the BBC, Bloomberg, and Al Jazeera, among others.