Free refinancing | Two Refi options with no closing costs
Explore no-fee refinancing
No-cost refinancing can reduce or eliminate your initial closing costs. This does not mean that you will not have fees when refinancing. On the contrary, you will not pay for them out of pocket.
Some homeowners avoid refinancing fees by building them into the loan balance. Others get the lender to cover their costs in exchange for a higher rate.
Both options have their pros and cons, so take the time to learn about no-cost refinancing methods before you apply.
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Two types of no-fee refinancing
Technically, you cannot refinance without closing costs. There are always associated fees. But you can avoid paying these fees up front by building them into your loan or having the lender pay your fees in exchange for a higher interest rate.
Both no-cost refinancing methods can save you money upfront, but they have unique advantages and disadvantages. Here’s what you need to know about each strategy.
1. Build closing costs into your loan
This type of refinance removes out-of-pocket costs by transferring your closing costs into your mortgage. Keep in mind, however, that this option will increase your mortgage balance. So if your current balance is $200,000 and you owe $5,000 in closing costs, your mortgage balance increases to $205,000. As a result, you’ll have a slightly higher mortgage payment and pay more interest over time.
While this is one way to avoid paying closing costs out of pocket, it’s not an option for everyone.
Generally, your mortgage balance cannot exceed the value of your property. Therefore, this cost-free refinancing only works when borrowers have sufficient home equity.
2. Closing costs paid by the lender in exchange for a higher rate
If you don’t have enough home equity, another option is a lender loan. In this scenario, your mortgage lender pays all or part of your closing costs. In exchange, you pay a slightly higher mortgage rate.
This can be a good solution if you don’t plan on keeping your new mortgage for that long. However, paying a higher rate on your entire loan amount will likely cost you more in the long run than deferring closing costs to your loan balance.
Compare refis with no closing costs
Here’s just one example to show how your long-term mortgage costs might change if you pay closing costs up front, build them into the loan balance, or use lender credit:
|Prepaid closing costs||Closing costs built into the loan||Closing costs paid by the lender|
|Amount of the loan||$300,000||$309,000||$300,000|
|Monthly P&I payment||$1,565||$1,605||$1,660|
|Interest paid over 30 years||$263,390||$270,160||$296,390|
All examples generated with The Mortgage Reports Mortgage Calculator. Interest rates are indicative only. Your own interest rate will be different.
Typical Refinance Costs
Since refinancing replaces an existing mortgage, it’s probably no surprise that you need to fill out a new mortgage application and start the loan process all over again.
Whether it’s a purchase or a refinance, getting a mortgage is not without closing costs. These expenses generally include:
- Loan origination fees
- Title search fees
- Credit application fees
- Registration fees
- Prepaid elements (taxes and home insurance)
Closing costs vary between 2% and 5% of the loan amount. Some borrowers pay closing costs using their personal funds while others build them into the loan balance or use lender credit to cover their costs in exchange for a slightly higher rate.
Is no cost refinancing a good idea?
In all honesty, it depends on the situation and the preferences of the borrower.
The benefit of no-cost refinancing is the ability to save money upfront. It is therefore a good idea if you do not have enough money in savings to cover your refinancing costs, or if you prefer not to touch your savings.
Keep in mind, however, that you will end up with a larger loan or a higher rate. So a no-fee refi only makes sense if you can afford a higher payment.
If you have enough savings to pay your closing costs upfront — meaning you’re not draining your savings account on the new loan — consider skipping a no-fee refinance and paying that expense out of your pocket. poached. This translates to the lowest possible monthly payment and you’ll save money in interest in the long run.
Also, if you are considering obtaining credit from a lender, consider your credit score first. If you have good credit, paying a slightly higher rate can still result in favorable terms. But if you have fair or poor credit, a higher rate could significantly increase your monthly payment.
Which type of no-cost refinance is best?
You might accept a lender if you don’t have enough equity to build closing costs into the loan. However, before getting credit from a lender to avoid closing costs, think about how long you will hold onto the new mortgage. A higher rate usually only makes sense when you don’t plan to hold the loan for the long term.
If you’re keeping the mortgage for the foreseeable future, it’s cheaper to pay closing costs up front (if possible). You will pay much less interest in the long term.
Also keep in mind that building closing costs into the loan results in additional interest being paid. Even so, this option can work if you have plenty of equity and aren’t worried about a slightly higher monthly payment.
No-Fee Refinance FAQs
A no-cost or no-cost refinance loan eliminates out-of-pocket costs at closing. That doesn’t mean you don’t have closing costs. On the contrary, you do not pay these costs in advance. Options include building closing costs into the loan balance or obtaining credit from the lender in exchange for paying a higher rate. A lender loan involves the lender paying some or all of your closing costs.
Closing costs cover all the costs necessary to set up your new loan. This includes lender and third party expenses such as loan origination fees, appraisal, title search, credit report fees, prepaid items and registration fees. These must be paid when you refinance, just like when you bought your home, because most of the same steps are required to create the new mortgage.
There’s no real cost-free refinancing, but you can avoid paying refinance fees up front. Discuss these options with your mortgage lender. If you have enough home equity, one option is to build closing costs into your loan. This results in a higher loan balance. You can also accept a higher mortgage rate so that your lender pays all or part of your closing costs.
A cash-out refinance involves replacing an old mortgage with a larger mortgage and then getting the difference in cash. Similar to a term refinance, a cash refinance has closing costs. These include loan origination fees and appraisal fees. Average closing costs range from two to five percent of the loan amount.
Paying your closing costs up front is often cheaper than building them into the mortgage. You will pay less interest over the life of the loan. Even then, it makes sense to include these costs in your loan if you can’t pay up front (and have enough net worth). You cannot get a mortgage greater than the value of your home.
When refinancing a principal residence, most closing costs are not tax deductible. This includes fees like a home inspection, registration fees, appraisal and attorney fees. You can, however, deduct mortgage interest and property taxes paid at closing. (But only if you itemize your taxes instead of taking the standard deduction.) The rules differ for a rental home; you can deduct closing costs when refinancing an income-generating property.
Refinancing can lower your mortgage rate and monthly payments and/or allow you to leverage the equity in your home. Before you refinance, however, review your credit score and current mortgage rates. Ideally, your new mortgage rate should be lower. Also think about how long you will keep the new loan. No-cost refinancing typically results in a higher mortgage balance and/or mortgage rate, so paying your closing costs up front is often cheaper in the long run.
Check your free refinancing options
Mortgage and refinance rates rose from all-time lows. But refinancing is still worth it for many homeowners.
If you want to refinance but prefer to avoid upfront costs, talk to a lender about refinancing options with no closing costs.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.