For the past few years, mortgage rates hovered near all-time lows, which drove a surge in refinancing activity. Refinancing at a lower interest rate can get you a lower monthly payment and save thousands of dollars over the life of your mortgage. But not every homeowner is refinancing—and one reason may be the steep closing costs involved.

That’s why a no-closing-cost refinance may sound tempting. It offers all the savings of a refinance at lower rates without the upfront costs. Too good to be true? It depends on your situation.

What Is a No-Closing-Cost Refinance?

Typically, a borrower pays 2% to 5% of the amount of their mortgage loan in closing costs. That means if you take out a $200,000 mortgage, you’d be responsible for paying between $4,000 and $10,000 upfront when you go to closing.

With a no-closing-cost refinance, those fees are rolled into the price of the loan, and the borrower doesn’t have to bring any funds to closing. “You pay no closing cost out of pocket, letting you save money by just signing,” says Benjamin Schandelson, loan originator and head of marketing at MJS Financial in Boca Raton, Florida. “However, it adds a little on top of the mortgage and a little on the payment.”

How Does a No-Closing-Cost Refinance Work?

When a lender offers you a refinance with no closing costs, they are simply adding the closing costs to your loan amount. So if you take out a $200,000 loan and your closing costs are $4,000, refinancing with no closing costs would mean you’re borrowing $204,000 instead of $200,000.

In exchange for avoiding closing costs, you’ll usually have to pay an interest rate that is slightly higher than the current rate (even if you have excellent credit).

“No-closing-cost refis are simply loans with a slightly higher rate where the borrower is able to use a lender credit for taking a higher rate to cover the closing costs,” says Brandonn Dukes, head of real estate and consumer lending at research firm Curinos. “Refinancing into a better rate is great and doing so with zero cost out of pocket is possible, but you sacrifice a potentially lower monthly payment by taking a higher rate.”

No-Closing-Cost Refinance Advantages

Refinancing without closing costs offers the clear advantage of getting a new mortgage without paying any cash upfront. And getting a lower interest rate will almost always translate into saving money over the full life of your loan (unless you increase the term of the loan).

No-Closing-Cost Refinance Disadvantages

Refinancing with no closing costs does have a downside. When you pay nothing upfront, you pay more over the life of the loan. For example, if you take $4,000 in lender credit on the $200,000 loan, you’re essentially rolling the $4,000 in closing costs into your refinanced mortgage loan. In return, you’ll pay an additional $3,700 in interest over 30 years with a 5% rate.

In addition, because you’ll have to pay a higher interest rate for the privilege of avoiding closing costs, your monthly payment will likely be higher than if you paid closing costs upfront.

Average Closing Costs For Refinance

The closing costs for refinancing are similar to the closing costs for an original mortgage. You’ll have to pay appraisal and loan origination fees, as well as fees for the application, title search, underwriting and other lender costs.

In most cases, these fees total at least 2% of your loan amount and often up to 5% or more. Those costs can make many homeowners hesitate before refinancing, especially in an uncertain economy. That’s why a no-closing-cost refinance can be tempting.

Dukes recommends shopping around, as some lenders offer more in lender credit for the same increase in rate. Others may have lower lender fees, so the closing costs added to your mortgage—also known as a lender credit—would be lower.

Can You Negotiate Closing Costs On A Refinance?

It’s always worth asking lenders if any of their closing costs are negotiable, and in 2022, you may be in luck. As rates have risen dramatically, mortgage applications have plunged: refinancings are 75% lower than a year ago, according to data from the Mortgage Bankers Association. That means lenders are much hungrier for your business now than they were a year ago.

How to Know if a No-Closing-Cost Refinance Is Right for You

The right decision about a refinance with no closing costs really depends on your specific situation. Here are three important points to consider as you weigh your options:

1. Overall Interest Costs

Look at how the refinance will affect your monthly financial situation and how much more you’ll end up paying in interest by taking a lender credit for your closing costs.

Keep in mind that if you pay closing costs up front, it usually takes at least a few years to break even with the savings on a lower interest rate. So if you plan to sell your home within a few years, paying closing costs upfront may not result in a net savings.

“If you are able to improve your rate, lower your monthly payment and do so with limited cash on hand, then you should take advantage of that,” Dukes says. “This is especially important if you can dramatically improve your rate, thus your monthly cash flow obligations.”

2. How Long You Plan to Stay in Your Home

Also, consider how long you will be in your home. “If you are planning to only stay in your home for a short time, and the increase in payments paid over that estimated time because of a higher rate is less than the closing cost, then you should go with the no closing cost refi,” Dukes says.

If, on the other hand, you are living in a home you plan on staying in for many years, you’ll need to weigh the additional monthly cost of the higher rate against the closing cost you could pay out of pocket now.

“Even an increase in rate of 0.25% on a $300,000 loan can cost you over $4,000 in 10 years in added payment, and nearly $15,000 over the life of the loan,” Dukes says. “If the closing cost out of pocket is less than $4,000 to keep the lower rate, it might be better to just pay them up front.”

3. Consider Your Loan-to-value Ratio

Think about your loan-to-value (LTV) ratio, which can affect your credit score as well as your interest rate. “If the appraisal came in high or you already own a lot of equity in the house, you can put the extra thousands on top of the loan amount [for closing costs] and not ruin your LTV,” Schandelson says. “But if the LTV is borderline on being too high, that might bring more costs into the deal and rolling in the closing costs is a bad idea.”

At the very least, it’s worth asking your lender about a no closing cost refinance, Schandelson says. “Asking will open the discussion to see if it could work for you,” he says.

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Frequently Asked Questions (FAQs)

Are refinance closing costs tax deductible?

Only if the costs are considered mortgage interest or real estate taxes. Most closing costs are fees for services, like title insurance and appraisals, and therefore are not tax deductible.

When is a no-closing-cost refinance worth it?

If you don’t plan to stay in your home for very long but can recoup some monthly budget savings by refinancing into a lower rate or for some other reason, a no-closing-cost refinance may be worth it. Just be sure you run the math using a trustworthy mortgage calculator to compare all the options.

How much does it cost to refinance a mortgage?

You should expect a refinance to cost anywhere from 2% to 5% of the loan amount. For example, that could be anywhere from $8,000 to $20,000 on a $400,000 mortgage.

When can you refinance your mortgage?

While different types of mortgages have varying restrictions, most require you to wait at least six months before refinancing.

Note that it’s also important to have a good reason to refinance. Just because you can do it doesn’t mean it makes financial sense to do so—especially given the hefty closing costs involved. For example, if you want to lower your interest rate, keep in mind that only 1.2 million homeowners in the U.S. can qualify for a better rate through refinancing, according to a June 2022 mortgage interest rates forecast.

Of course, you may have other reasons to refinance other than getting a lower rate. Getting rid of mortgage insurance may be one. Just make sure you know what the costs are and how much you’ll wind up paying upfront and over the life of the loan for any option you explore.

How long does a refinance take?

Refinancing a mortgage generally takes about 45 to 60 days. To keep the process as efficient as possible, prepare all your documentation and do as much upfront research on lenders as you can.

There are also several programs that promise to cut that timeline down. Look for the word “streamline” in the title. There are streamline options available for mortgages backed by the: