• No-closing-cost refinancing allows homeowners to avoid paying closing costs out of pocket by either rolling closing costs into the loan amount or replacing closing costs with a higher interest rate. 
  • No-closing-cost refinancing may save money in the short term, but it typically costs more in the long term by increasing the total interest expense of the refinance (refi). 
  • Before choosing a no-closing-cost refinance, consider the impact on your new mortgage payments and your total interest expense. 
  • Whether buying a new home or refinancing an existing mortgage, borrowers typically pay closing costs to cover the administrative fees associated with originating a new home loan. A no-closing-cost refinance could help borrowers avoid paying these closing costs out of pocket, but there is a financial tradeoff. 

In this article, we’ll explain how no-closing-cost refinancing works, outline the pros and cons, and explore situations in which a no-closing-cost refinance could be a better option than a traditional refinance.  

What Is a No-Closing-Cost Refinance?

A no-closing-cost refinance replaces your current mortgage loan with a new loan without requiring that you pay upfront closing costs for originating the new loan. Instead, the closing costs are either rolled into the new loan or exchanged for a higher interest rate.[1]

No-Closing-Cost Refinance vs. Traditional Refinance

While closing costs are deferred or exchanged for a higher interest rate with a no-closing-cost refinance, they are paid upfront with a traditional refinance. These closing cost fees typically total 3-6% of the loan amount.[2]

How Does No-Closing-Cost Refinancing Work?

With a no-closing-cost refinance, you can either:

  1. Roll the closing costs into the new home loan, or 
  2. Accept a higher interest rate instead of paying closing costs (known as lender credits). 

Let’s take a closer look at each option.

Option 1: Rolling Closing Costs into the Loan

Rolling the closing costs into the loan means increasing the loan amount to include the closing costs. This can mean a higher total interest expense because you’ll pay interest on the closing costs as well as the amount of the refinance itself.   

For example, if you are rolling closing costs of 3% into a refinance of a $200,000 loan balance, your refinanced loan amount would be $206,000. Instead of paying interest on a $200,000 loan, you would pay interest on a $206,000 loan. With an interest rate of 7% over a 30-year loan, this could increase your mortgage payment by around $40 per month and add around $8,370 to your total expense compared to paying the fees upfront. Example provided for illustrative purposes only.

Option 2: Accepting a Higher Interest Rate in Lieu of Closing Costs

Many lenders offer a lender credit to cover the closing costs, so long as the borrower accepts a higher interest rate to help the lender recover that upfront credit. In this case, the interest rate for the refinance loan may increase by .25-.5%, depending on factors like loan balance, lender policies, and the borrower’s financial profile. 

For example, you might accept an interest rate of 7.25% instead of 7% on a $200,000 refinance to receive a lender credit for the closing costs. In this case, the monthly payment on a 30-year mortgage would increase by around $33.75 with the higher interest rate, and the total interest expense would be around $12,150 higher. Example provided for illustrative purposes only.

Types of Loans That Are Eligible for a No-Closing-Cost Refinance 

Most home loans are eligible for a no-closing-cost refinance. However, availability may vary by lender and specific loan programs. Here is a list of home loans that may qualify for a no-closing-cost refinance:

  • Conventional loans. Conventional loans are the most common type of home loan for American property owners. In addition to financing primary residences, conventional loans can be used to purchase second homes, vacation homes, and even investment properties.
  • FHA loans. Backed by the Federal Housing Administration, FHA loans are a popular option for first-time homebuyers and those with lower credit scores. Standard rate and term refinancing for FHA loans are eligible for both no-closing-cost options. However, the FHA does not allow lenders to roll closing costs into the new loan under FHA Streamline Refinancing (which replaces an existing FHA loan with a new FHA loan with minimal paperwork).[3] Learn more about FHA loans and refinancing options. 
  • VA loans. Backed by the U.S. Department of Veterans Affairs, VA loans are reserved for military service members, veterans, and their spouses. VA Interest Rate Reduction Refinance Loan (IRRRL), also known as VA Streamline Refinancing, allows for interest rate trade-offs but may limit rolling closing costs into the loan. Learn more about VA loan refinancing.
  • USDA loans. Backed by the U.S. Department of Agriculture, USDA loans promote homeownership in rural markets. The USDA permits both no-closing-cost options for traditional USDA refinancing and USDA Streamlined Assist, but lender participation in these programs varies.[4]
  • Jumbo loans. Jumbo loans allow loan amounts to exceed limits set for conforming loans. Some lenders offer both no-closing-cost options for jumbo loans.
  • Home equity loans. Home equity loans allow homeowners to convert some of their home equity into cash. Like other mortgage loan types, home equity loans can often be refinanced without upfront closing costs.  

Pros and Cons of No-Closing-Cost Refinance

Before applying for a no-closing-cost refinance, consider the advantages and disadvantages of this structure. 

Benefits of No-Closing-Cost Refinance

  • No upfront costs. Since you don’t need to have cash available to cover the refinancing closing costs, refinancing becomes more accessible.
  • Keeps cash on hand. Even if you have the funds available to cover the closing costs upfront, you may prefer a no-closing-cost refinance to strategically keep your cash available for emergencies, home improvement projects, or investments.
  • May cost less if the loan is repaid quickly. If you plan to move or refinance again in a few years, accepting a higher interest rate could potentially save more than paying closing costs upfront.

Possible Drawbacks of No-Closing-Cost Refinance

  • Not truly “no-cost.” You still pay the closing costs, but the amount is paid indirectly through higher payments caused by a larger loan amount or a higher interest rate.
  • May cost more over time. Skipping the upfront fees could result in higher total costs due to increased interest expenses.

Factors To Consider Before Choosing No-Closing-Cost Refinance

Before choosing a no-closing-cost refinance, consider the following:

The Effect on the Loan Balance 

A no-closing-cost refinance may seem appealing upfront, but it often leads to higher long-term costs. If the lender covers your closing costs in exchange for a higher interest rate, you’ll pay more in interest over the life of the loan. Alternatively, if the closing costs are rolled into your loan balance, the principal balance of your loan increases, which can increase the total interest paid. This approach may still make financial sense if you don’t plan to keep the loan for the full term, but it’s important to weigh the short-term savings against the long-term cost.

Your Loan-to-Value Ratio and Credit Score

Your ability to refinance is based on several factors, including your loan-to-value (LTV) ratio and credit score.

Your LTV is the amount of the home that is financed compared to the current fair market value of the home. For example, if your home is worth $500,000, and your mortgage balance is $200,000, the LTV is 40% (200,000 / 500,000 = .4). Lenders typically set a maximum LTV for refinancing. For example, your LTV may need to be 80% or less to qualify for a refinance. 

Your credit score is a numerical indicator of your history of managing debt. Lenders may use this number to assess the risk of extending credit, typically reserving more favorable loan terms for borrowers with higher credit scores.[5] A credit score below the lender’s minimum (e.g., 620) may disqualify a borrower from refinancing.       

Impact of Lender Credit and Interest Rate Changes

If you are considering the no-closing-cost option with the lender credit, it is important to understand how the higher interest rate will affect your monthly payments and overall interest expense. Even a small rate increase (such as 0.25%) can add up to thousands of dollars in extra interest over 30 years. Additionally, if interest rates are volatile or expected to decrease, committing to a higher rate for convenience may cost more than waiting to save up the money to cover the costs upfront.

Calculating the Break-even Point of a No-Closing-Cost Refinance

When deciding between a traditional and no-closing-cost refinance, it’s helpful to determine the break-even point of the no-closing-cost option. The break-even point is the moment when the savings from a lower interest rate outweigh the upfront closing costs. 

To calculate your break-even point, divide the total estimated closing costs by the estimated monthly expense of choosing the no-closing-cost refinance over the traditional refinance. This tells you how many months it would take to break even. 

For example, if closing costs are $6,000, and a no-closing-cost refinance would cost $40 more per month than a traditional refinance, the break-even point is 150 months (6,000 / 40 = 150). 

If you expect to keep the loan beyond that breakeven point, a traditional refinance with lower rates may save you more in the long run. On the other hand, if you’re looking for short-term flexibility or immediate savings, a no-closing-cost option may better serve your goals. 

Your decision should align with your broader financial goals, such as paying off debt, investing, or preparing for a job relocation or retirement.

Final Thoughts on No-Closing-Cost Refinancing

A no-closing-cost refinance can save you money upfront by rolling the costs into the loan or accepting a lender credit in exchange for a higher interest rate. However, this may cost you more over the long term, particularly if you plan to remain in the home under the same loan for many years to come.

Carefully consider your unique financial position and goals when choosing between a no-closing-cost refinance and a traditional refinance.