The closing costs on a mortgage refinance can be thousands of dollars. In a typical scenario, the borrower brings a check to the closing table to pay for costs such as title search, title insurance, application fee, and the appraisal fee.
But there are ways to wrap closing costs into the new loan by choosing a no-closing cost mortgage. This article provides information about no-closing cost mortgages, advantages and disadvantages, and more.
With a no-closing cost refinance, you do not need to pay for these expenses upfront. Choosing the no-closing cost route usually means you pay a higher interest rate for the length of the loan; you are borrowing the closing costs and financing them into your new loan. You also can wrap the costs of closing into the loan, which results in paying interest in a higher principal for the life of the loan.
Note that closing costs vary on refinances from state to state, so you could be paying more interest in closing costs in some states compared to others.
List of Typical Mortgage Refinance Closing Costs
- Loan origination fee: You pay an origination fee to the lender to prepare your refinance loan. The typical fee is 1% of the loan amount.
- Appraisal fee: An appraiser comes to the house to assess the value. When you do most refinances, you need another appraisal to make sure the property value has not dropped since you purchased the home. The cost is usually $300 to $500.
- Title fees: You receive a deed when you buy your home, which shows that the seller has transferred legal ownership of the property to you. Title insurance guards you from errors in ownership records of the home. You need a new title policy when you do a mortgage refinance because it is a new loan. Most title insurance firms will offer you a discount if you are a returning customer.
- Credit report fee: Lenders must verify that your credit score has not gone down since you purchased your home. Credit report fees run $40 to $50 depending on the lender and state of residence.
- Prepaid interest: You may need to pay the first month’s interest during closing.
- Discount points: These are optional and refer to the fee you pay the lender to get a lower interest rate. Each point costs 1% of the loan amount.
No-Closing Cost Loans and Interest Rates
If you want no closing costs with your refinance, you have to accept a higher interest rate for as long as you hold the loan. Keep in mind that just a small change in interest rate can make you pay much more in interest over time.
For example, say you finance a $150,000 home at 3.5% with a 15-year term. Closing costs will run between 3-6% depending on your state. If your closing costs are $6,000, you will pay approximately $43,000 in interest over the course of the loan. The total will be around $49,000 with closing costs.
But if you choose a no-closing cost loan, you will pay a rate of 4.1%. The total amount you will pay in interest is $51,000. So you pay more than $2000 more for your refinance. As the interest rate goes up, so does the amount of interest you pay. Make sure you crunch the numbers before you decide to pay a higher interest rate.
Another option is to roll the closing costs into the principal balance. This does not affect your interest rate, but you will pay more interest over the life of the loan on the larger principal.
Also, consider how long you intend to stay in your home.
No Free Lunch – You Still Pay Closing Costs With a No-Closing Cost Refinance
Should you get a no-closing cost refinance? It is critical to assess your current financial situation and long-term plans when you do a refinance, especially when you are considering wrapping closing costs into the new loan. How long you want to stay in your home is a crucial factor to consider in the loan you choose.
For example, if you plan to move out of your home in three or four years when your last child graduates from high school, a no-closing cost refinance could be a good choice. It may take at least five years to recover the closing costs with a typical refinance mortgage. So paying a higher interest rate for three or four years but saving those out of pocket costs now could be cheaper for you.
A no-closing cost mortgage might not be the best fit for you if you want to stay in your home for a long time. If you have a young family and intend to stay in the home for 10 or more years until your children graduate, you will pay a higher interest rate for all of those years. This will cost you much more out of pocket than if you had paid the closing costs upfront.
Application Fee and Appraisal Waivers
You also can reduce your refinance costs by seeing if you can qualify for an application fee and appraisal waiver. To see if this is possible, contact a mortgage lender. The typical appraisal is $450 to $650 depending upon your state and the type of property. If you are doing a simple term refinance with FHA, you probably do not have to do a new appraisal, so this will save you money.
Some mortgage lenders will waive the appraisal for low-risk financial transactions or for borrowers with a lot of equity. Other lenders might waive the application fee, especially if you are a current customer.
Ways to Save When Refinancing
Whether you pay closing costs upfront, pay a higher interest rate, or roll them into your loan, there are some ways to save money during the process: (Smartasset.com)
- Waive the home appraisal: If the home was appraised recently, you may be able to skip this cost as part of your closing process. Ask the lender if you can waive the appraisal. If this is not possible, ask for an automated appraisal rather than a full one. If you are doing an FHA Streamline refinance, you do not need to pay for a new appraisal; the one that was done when you bought the home is used.
- Save money on title insurance: Request a ‘re-issue’ rate when you renew your title insurance for a refinance.
- Boost your credit score: Before you apply for a mortgage, try to pay down debt, keep all your payments on time, and do not open any new credit accounts.
- Don’t take cash out: Taking out cash increases your interest rate.
A no-closing cost refinance can help you refinance your home without out of pocket expenses. But you will pay a higher interest rate for years to cover the closing costs. Or, you can roll the closing costs into the principal balance and pay more interest on the larger amount over the life of the loan. Depending on how long you stay in your home, you could pay more in interest than what you would have paid in closing costs if you had just brought a check to the closing table.
The right choice depends on your personal financial situation. So, determine how long you want to stay in the home, run the numbers with a higher interest rate on a no-closing cost option, then you can make the best decision for your family.