# No-closing-cost refinance A no-closing-cost refinance is not free. It is a higher rate in exchange for the fees. Here is how to work out whether the trade is worth it. "No closing cost" does not mean the costs disappear. It means they are paid out of the loan in one of three ways: a higher interest rate, a larger loan balance, or a lender credit priced into the rate. Knowing which one you have been offered is the whole decision, because each costs a different amount over the life of the loan. ## The three structures Lender credit. The lender covers the closing costs and charges a higher rate to recover them. This is the commonest structure. You pay nothing at closing and more every month. Costs rolled into the loan. The fees are added to the principal. Nothing is paid at closing, and you pay interest on the fees for the whole term. On a thirty-year loan this is the most expensive of the three. Genuinely absorbed costs. A small number of lenders waive specific fees for specific products. Ask which fees are actually waived and which have been repriced into the rate. - Ask for the rate with costs paid and the rate with costs financed, in writing. - Work out the break-even: how many months of the lower payment recover the fees you would have paid. - Divide the total fees by the monthly saving to get the number of months. ## When the trade makes sense It makes sense when you expect to move or refinance again before the break-even point, because you never recover the fees and you paid none up front. It also makes sense when you genuinely do not have the cash and the alternative is not refinancing at all. It makes poor sense when you intend to keep the loan for its full term. Over thirty years, a fraction of a percentage point on a large balance exceeds the closing costs several times over. The longer you stay, the more the higher rate costs, and the less the avoided fees matter. ## The fees that are never really waived Some costs belong to third parties and cannot be waived by a lender: appraisal, title search and insurance, recording fees, and prepaid interest and escrow funding. A no-closing-cost offer typically absorbs the lender's own origination and processing charges and leaves the third-party costs for you to pay at closing, or rolls them into the balance. Ask for the cash-to-close figure, the actual amount you must bring, and do not accept "zero cost" as an answer to that specific question. Also ask which costs are covered and which are repriced into the rate. A lender that waives a fee in exchange for a higher rate has not given you anything; it has lent you the fee at a high effective rate. ## The break-even is not the only test Break-even tells you when the fees are recovered. It does not tell you whether the new loan is better overall, because resetting the amortisation clock restarts the years of interest. If you have nineteen years left and you refinance into a new thirty-year term, the payment falls sharply and the total interest can rise even at a much lower rate. Compare the two schedules on total interest remaining, not on the payment. Run the break-even calculation for fee recovery, then run the payment calculation for total interest under each structure, and compare the totals rather than the monthly figures. ## What to ask for, in writing, from every lender Ask each lender for four figures: the interest rate with the costs paid at closing, the rate with the costs financed, the cash-to-close for each, and whether either rate carries a prepayment penalty. Those four numbers make offers directly comparable, and asking for all four is the single most effective thing a borrower can do. If a lender will only quote one structure, ask what the other one would cost. An unwillingness to quote both is a signal about how the offer is priced. ## A worked comparison you can do yourself Take the two rates you have been offered and the closing costs you would otherwise pay. Enter your current payment, the new payment under each structure, and the costs into a break-even calculator. It returns the number of months to recover the costs and the cumulative saving at twelve, twenty-four, thirty-six and sixty months, which is the comparison that matters. Then ask one more question: how long do you actually expect to keep this loan? The honest answer decides which structure is cheaper for you, regardless of what the marketing calls it. ## The questions a lender will not volunteer Three questions separate a genuine no-closing-cost offer from a repriced one. First, what is the rate without the credit? A lender that will quote only the credit rate is hiding the price of the structure. Second, what is the cash-to-close? The answer is rarely zero, and the number matters. Third, what happens if you sell or refinance inside the first few years? Some products carry a prepayment penalty that erases the benefit of avoiding the fees. Get all three answers in writing and compare them against the same three answers from another lender. The offer that survives that comparison is the one worth taking. ## Related pages - Mortgage refinance costs - Refinance break-even calculator - Home equity costs Source: https://costreference.com/guides/no-closing-cost-refinance/