When Should I Refinance With a No Closing Cost Mortgage?

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No closing cost mortgages can be a great way to lower your interest rate without paying fees.
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The idea of getting a mortgage that has no closing costs may seem too good to be true, but they’re out there if you look hard enough.

Money expert Clark Howard believes that borrowers who don’t have the cash for closing costs that accompany traditional refinances shouldn’t give up. He says they’d be better off accessing the money through a no closing cost loan — even if it means paying a slightly higher interest rate.

In this article, I’ll dive into what a no closing cost mortgage is, where to find one, who Clark thinks is a good candidate for one, and I’ll compare it to some other products on the market.


What Is a No Closing Cost Mortgage?

As the name indicates, a no closing cost mortgage is a home loan that does not require the borrower to pay any of the fees associated with the closing of the loan. 

You can call it a “no closing cost mortgage”, “no closing cost loan” or “no-cost refinance,” but they all mean the same thing. You don’t have to pay the closing costs upfront, but you will pay a higher interest rate.

If you borrow with this type of loan, you will likely owe nothing out of pocket for things like:

  • Origination fees
  • Title fees
  • Prepaid interest
  • Discount points

Those costs can add up quickly. According to a recent study of United States mortgage refinances, the national average for closing costs is $5,749.

In exchange for this reprieve, you can expect to pay a higher interest rate than someone who pays the closing costs out of pocket or rolls them into their new loan.

Clark says you can expect the interest rate on a no-cost refinance to be approximately 0.5% to 0.625% higher than the market rate for a traditional loan with closing costs.


Clark’s 3 Types of Candidates for a No-Cost Refinance

You’re probably wondering whether you should shop for a no-cost refinance and when is the right time to get one.

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Clark says that there are three different types of homeowners especially suited for doing a no-cost refinance rather than shopping for the lowest possible interest rate.

1. You Don’t Have the Money to Pay Closing Costs

If the record-low interest rates have piqued your interest — but you don’t have the money to pay for closing costs — you’re likely the top candidate for this type of loan.

“A lot of people fall into this category, believe it or not,” Clark said. “There are plenty of people who would benefit from a re-fi, but they just don’t have the money to make it happen.”

If you don’t have thousands in reserve funds but can find a no closing cost interest rate that’s below your current mortgage interest rate, this type of loan is for you. And you’d likely see immediate savings on how much interest you owe each month.

2. You Don’t Know How Long You Intend to Stay in the House

Are you working a job away from your hometown and unsure of how long you’ll stay in your current city? Are you considering taking that new job offer a couple of states away?

Clark says you could potentially benefit from refinancing through a no closing cost loan.

When you refinance with closing costs you may get a lower interest rate, but there is a period during which you have to recoup the costs of the new loan through interest savings.

If you sell the home before recouping those costs, a traditional refinance may have ended up costing you money despite that lower interest rate.

A no closing cost loan, however, will give you instant savings on interest owed.

3. You Know You’ll Be in Your House For a Short Period

If you know you’ll be moving out of your home sometime soon, Clark says this is the only type of refinancing you should consider.

“This could be someone who knows they will be in the home for a relatively short period of time,” Clark said. “They can save money from the get-go with this type of loan.”

Clark has a 30-month breakeven rule. It says you should be able to recoup your costs of refinancing a mortgage through interest savings within the first 30 months of a new loan. But if you know you’re not going to be in a home at least 30 months, the decision to avoid refinancing costs is almost assuredly a sound one.

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Even if that savings is less than that what you’d get with a better interest rate, it will show up in Month #1 if you’ve chosen a no closing cost refinance.


No Closing Cost Loan vs. Rolling Closing Cost into Mortgage

There is another alternative for borrowers who don’t have the cash available to pay closing costs.

Many lenders will let borrowers “roll” closing costs into their new mortgage. In other words, the bank will front you the money in exchange for being able to charge interest on the amount you’ve tacked onto the loan.

Clark says that’s not wrong to do, but he prefers the no closing cost method because rolling the closing costs into the loan could create an equity issue if you have to sell the house long before you pay off the loan.

“I’ve never been a fan of people rolling the closing costs into the loan, because then you’re raising the balance on your loan and you’re going to be paying interest on a higher balance on the loan,” Clark cautions. “And if you end up being a short-termer there, you’re going to have less equity in your home when you go to sell it.

“It’s not wrong to do it that way, I just think it’s better to take a higher interest rate than to take a higher balance on your loan.”

You can use Clark’s mortgage refinance calculator to figure out the breakeven point (in monthly payments) for rolling closing costs into your mortgage. If there’s a possibility you could be moving before reaching that point, a no closing cost loan would be a better refinancing option.


Where to Look for a No Closing Cost Mortgage

Not all lenders offer no closing cost refinances, so you may have to search a little to find one.

“Generally you’re going to find no closing cost re-fis through mortgage brokers and credit unions,” Clark says. “Most mortgage brokers can place you that way if you ask, but not all credit unions have no closing cost loans at their disposal.”

Clark doesn’t endorse a specific mortgage broker. He says it’s best to shop around for reputable brokers in your community or go online to get a handful of quotes.

I did a little poking around and found that U.S. Bank has a no closing cost refinance program that may be a good sample of what you can expect to find online.

But that’s just an example. Because of the potential for exorbitant fees and inflated interest rates, one place Clark does not want you searching for a refinanced mortgage is a ‘big bank.'”

“Most big banks won’t do [no cost re-fis], but big banks are really a terrible choice for mortgages anyway,” Clark says.


No One is Escaping This New Mortgage Fee

Beginning in December 2020, the Federal Housing Finance Agency will start charging a new 0.5% fee on most mortgage refinance loans.

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It’s called the Adverse Market Finance Fee. Clark says it’s an effort by the federal government to build up a “war chest of reserves” in case foreclosures increase because of the COVID-related economic downturn.

No matter the reason, that fee will cost an additional $1,500 on the refinance of a $300,000 loan, for example.

Some people may be looking to no closing cost loans as a way to skirt that new fee. Clark says that’s a pipedream: Mortgage lenders will simply bake the costs of the fee into the interest rate they’re offering on the no closing cost option.

“This doesn’t impact your decision on the type of loan you should get,” Clark says. “This is going to be another expense built into the cost of a loan. You’re either writing a check for it at closing, or you’re going to pay for it via an increased interest rate in the no closing cost option.”

However, Clark does say the fee could push out the breakeven point for closing costs to a spot where more people could benefit from the no closing cost option.


Final Thoughts

If you fall into one of the three categories of borrowers that Clark says are candidates for a no closing cost loan, you should take action by contacting a local mortgage broker or credit union to compare rates.

You also can use Clark’s mortgage refinance calculator to see how different types of loans measure up to his 30-month breakeven rule. If the breakeven is in the near-term and you have the money for closing costs, you’re likely better off taking the lower interest rate that comes with a traditional mortgage.

But if you’re uncertain about your future in your home and can lower your current rate by taking a no closing cost refinance, it’s an easy decision to proceed with that option. You’ll start seeing interest savings on the very first payment.

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