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How to get a no closing cost refinance

No Closing Cost Refinance: Mortgages always have closing costs. But you don’t always have to pay those costs out of pocket.

If you don’t want to pay closing costs in cash, you may be able to simply roll them over into your loan balance. Alternatively, some lenders will pay your costs in exchange for a slightly higher rate.

If you’re looking for a co-closing-cost mortgage, here’s what you need to do.

What is a no closing cost refinance?

No-Closing-Cost Refinance – Not exactly what it sounds like. There are still closing costs. You don’t pay them directly.

With a no-closing-cost mortgage, the lender covers part or all of your closing costs. In return, you pay a higher interest rate. The added benefit of the lender being your higher rate pays off your closing costs in the long run.

In most cases, lenders can cover some or all of your closing costs, including loan origination fees, appraisal fees, title search and title insurance fees, and prepaid taxes and insurance.

How much are mortgage closing costs?

Closing costs usually range from 2% to 5% of your home’s purchase price. Some costs, such as underwriting or loan origination fees, are charged as a percentage of your loan amount. Other costs, such as the home appraisal, are charged as flat fees.

How does a no-closing-cost home loan work?

There are several ways to structure a no-closing-cost mortgage. A lender might cover all your upfront fees or pay only select closing costs.

No-closing-cost mortgage examples

  • 5% rate: The borrower pays all closing costs, including lender fees, third party fees, and prepaid costs
  • 5.125% rate: The borrower pays no lender fees, but does pay third-party costs and prepaid costs
  • 5.5% rate: The borrower pays no lender or third party charges, only prepaid costs
  • 5.625% rate: The borrower pays nothing out of pocket whatsoever

Types of no-closing-cost mortgages

  • A zero-cost mortgage
  • A no-cost mortgage
  • Lender credits
  • Rebate pricing
  • Lender-paid closing costs

Consider your long-term costs

This is no free lunch. If you keep the loan for a long time, you could end up paying more via the higher interest rate than you would have paid in upfront closing costs.

No-closing-cost mortgage disadvantages

“Keep in mind that even paying 0.25% to 0.375% higher than the lowest rate possible should not matter too much, as long as you are saving money,”

No-closing-cost refinancing

  • Will your monthly payments still be reduced at the no-closing-cost mortgage rate?
  • How long do you plan to keep the mortgage before moving or refinancing again?
  • How much more will you have paid in interest by the time you sell or refinance? Is this amount higher or lower than paying closing costs upfront?

Finding your ‘break-even point’

If a no-cost mortgage adds $100 a month, and your lender is paying $4,000 in closing costs, you’d break even after 40 mortgage payments — that’s three years and four months.

Is a no-closing-cost refinance worth it?

This kind of loan makes the most sense if you’re planning to move or refinance again before you reach the break-even point.

No-closing-cost mortgage alternatives

  • Roll closing cost into your loan
  • Leverage a broker’s yield spread premium (YSP) against your closing fees

Debt Consolidation Loans

Using YSP to your advantage

Since you know about YSP, you can ask your broker to use it to engineer your no-cost home loan.

For instance, a broker getting paid a 1% YSP by the lender need not charge the borrower an origination fee. In this case, the YSP can save you one percent of your loan amount in out-of-pocket costs. A broker getting 2% YSP can cover even more of your closing costs.

When comparing no cost loans between mortgage lenders and brokers, ask for the same structure from each.

Tips to lower your no-cost mortgage rate

  • A credit score above 720
  • A clean credit report with no late payments
  • A debt-to-income ratio (DTI) below 43%
  • A loan-to-value ratio (LTV) below 80% (meaning you have at least 20% home equity)
  • A shorter loan term (if you can afford the higher monthly payment)

Additionally, refinancing with at least 20% equity — or buying a home with a 20% down payment — can help you avoid private mortgage insurance (PMI) or FHA mortgage insurance premiums (MIP).

No-closing-cost mortgage FAQ

Who offers a no-closing-cost mortgage?

Many lenders offer no-closing-cost home loans and refinance loans, even though closing fees still exist. What these lenders mean is that they’ll pay your closing costs in exchange for a higher mortgage rate. Before accepting this kind of mortgage, compare the additional long-term costs to your short-term savings. You may find you’ll save more paying closing costs out of pocket, if you can.

Can you buy a house with no closing costs?

A real estate transaction requires closing costs. If you can’t — or would rather not — pay them up front and out-of-pocket, you could accept a higher interest rate in exchange for your lender’s help covering these costs. Sometimes, buyers can get the seller’s help paying closing costs. Additionally, many first-time homebuyers qualify for local down payment and closing cost assistance programs.

How can you avoid paying closing costs?

Buying a new home, or refinancing an existing home loan, will require closing costs. But instead of paying them outright, you could ask your loan officer about adding some of them to your loan amount. You could also get lender credits which amounts to accepting a higher interest rate in exchange for help covering closing costs. Or, you could ask the seller to help you pay closing costs. Sellers aren’t obligated to help. Be sure to ask before going under contract to buy the home.

What are today’s mortgage rates?

Purchase and refinance rates are rising from their recent historic lows, but many borrowers will still qualify for advantageous mortgage rates. As such, many homebuyers and homeowners can get the lender to cover their upfront costs and still secure a competitive interest rate.

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