Refinancing with no settlement costs: what it is and how it works

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Closing costs associated with mortgage refinancing are typically 2% to 5% of your loan amount. However, these fees can be incorporated into your new loan with no settlement cost refinancing. With no-closing-cost refinancing, you don’t avoid closing costs entirely – instead, you fund those costs as part of the loan. If you plan to stay at home for a shorter period of time, you might consider refinancing without transaction fees. Here are the facts to help you decide.

What is No Settlement Cost Refinance?

Refinancing with no closing costs is a refinancing where you can get a loan without paying closing costs up front. Instead, you can lend them a loan or pay a higher interest rate for the same principal balance.

In a typical refinance, the borrower pays a one-time fee at closing to cover costs such as appraisal fees, title search, title insurance and application fees.

How does no settlement cost refinance work?

There are no closing costs to refinance without closing costs, but there are tradeoffs. This includes charging higher interest rates, which can cost more over the life of the mortgage. Refinancing without closing costs can also include fees in the financing so that fees are not charged up front, but spread out over the life of the loan.

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Common closing costs for refinancing

Closing costs are typically 2% to 5% of the loan amount. However, they vary by state. According to ClosingCorp, the national average cost of refinancing a single-family home in 2021 will be $2,375. In addition to application fees that some lenders charge and others don’t, common closing fees include:

Appraisal Fee: An appraisal fee is charged when a professional appraiser inspects a home to determine its value before a lender makes a mortgage offer. It usually ranges from $300 to $450 or more.

Credit check: Lenders often charge a fee to collect your credit report to determine if you are an eligible borrower. It can cost $25 or more per borrower.

Settlement Fee: Some lenders charge a loan fee, usually around 1% of the borrowed amount.

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Title Search: Unless you’re buying a new home, lenders will search title records for home titles to make sure there are no title or lien issues. This can cost around $450.

Mortgage Insurance: Most FHA loans include an upfront mortgage insurance premium. Usually 1.75% of the loan amount. If you are doing an FHA Simplified Refinance to convert one FHA loan to another, the fee is 0.1%.

VA Financing Fee: When you refinance your VA loan, you must repay a percentage of the new loan to the Department of Veterans Affairs. If this is your first VA loan, you will pay a 2.3% financing fee. If you use a refinance from one VA loan to another in an Interest Reduced Refinance Loan (IRRRL) or VA Streamline, the financing fee is 0.5%.

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Pros and cons of refinancing with no settlement costs

Pros

No cash advance required
You can save money if you are at home for a short period of time
Earlier break-even point, great for dealers
Allows you to use your savings for other projects, such as renovations

Cons

It may cost more if you are at home for long periods of time
You may need to pay for mortgage insurance
Usually has a higher monthly payment
Usually higher interest rates

When to Choose a No Closing Cost Mortgage

It’s important to understand how long you plan to stay at the property and how much your break-even point might affect your potential transaction costs.

When it makes sense: If you plan to move within a year and it will take two to three years to recoup your transaction costs, then even if you pay a little more, you can still earn net savings on your loan interest while you move in .
When it doesn’t make sense: If you plan to stay in the property for decades, and you’ll recoup your upfront closing costs in two or three years, closing for free doesn’t make sense because you’ll be paying more in the long run.

“The extra interest on the loan has increased over time,” said Greg McBride, chief financial analyst at Bankrate. “And the longer you have the loan, the higher the cost. If you have the loan in the next few decades, you may have to pay a few closing fees.”

If you want your lender to include closing costs in the refinance amount, you need to make sure your total payment (principal and interest) is less than the amount you paid for closing costs up front. this is not always the case.

Incorporating your transaction costs into a new mortgage also affects your loan-to-value (LTV), McBride said. This could reduce your home equity to the point where you now have to pay Private Mortgage Insurance (PMI) on a monthly payment basis

Other ways to reduce refinancing costs

Getting a mortgage with no closing costs isn’t the only way to reduce upfront mortgage costs. Here are some other ways to reduce out-of-pocket costs:

Check if you qualify for a waiver: Some lenders waive appraisal fees for existing customers or borrowers with substantial home equity.
Application fee discount: If you are applying with a bank you already have an account with, ask them if they charge an application fee. Many lenders offer such additional services to existing customers.
Shop around: This is probably the most important thing you can do. Get quotes from multiple mortgage lenders and make sure you compare all the different terms – not just interest rates, but closing costs and other fees. Work with a lender to get you the best price.

Is no settlement cost refinancing right for you?

Refinancing with no closing costs can be a good option for someone who doesn’t plan to stay at home for a few years. If you plan to stay at home long-term, refinancing with no closing costs may cost more over time.

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