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The basics of no-closing-cost mortgage refinancing

Bankrate logo Bankrate 8/8/2019 Mia Taylor
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The closing costs associated with a refinance can be substantial, but it's possible to wrap these expenses into your new loan with a no-closing-cost mortgage.

In a typical refinance, a borrower brings a check to the closing table to cover costs such as the appraisal fee, title search, title insurance and application fee.

What is a no-closing-cost mortgage refinance?

However, with a no-closing-cost option, you don't pay for those items up front. Taking that route essentially means you pay a higher interest rate for the term of the loan, because you're borrowing the closing costs by financing them into the loan.

Keep in mind that closing costs vary from state to state, according to Bankrate's Closing Costs Survey. While average closing costs in 2017 in Utah were $1,891 for example, in New York they were $2,648. The nationwide average was $2,084.

The Bankrate.com refinance calculator can help you determine the actual savings and costs of refinancing your current mortgage. You can also check actual rates in your area with our refinance rate table.

Why no closing costs doesn’t mean free closing costs

Taking your current situation and long-term plans into account is crucial when refinancing, particularly when contemplating a no-cost refinance.

For instance, if you plan to stay in your home for five years or less, a no-closing cost mortgage might be a good option. It can take more than five years to recover closing costs with a traditional mortgage, so paying the higher rate over a few years but saving those costs now could end up being cheaper for you.

On the other hand, a no-closing-cost mortgage means paying a higher interest rate for the life of the loan. If you plan to stay in your home for an extended period, that higher interest rate could cost you far more out of pocket over the long run.

"No closing or low closing cost mortgages almost always carry a higher interest rate," Ralph DiBugnara, president of Home Qualified and vice president of Cardinal Financial. "If your plan is long-term it will almost always make more sense to pay the closing costs and take the lower rate. If your plan is short-term then no closing costs and paying more interest over a short period of time will be more cost effective."

Be sure to ask about application fee and appraisal waivers

Yet another way to reduce refinance costs is to ask whether you qualify for an appraisal waiver, said Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate.

"To see if you qualify for an appraisal waiver you'll want to reach out to a mortgage lender," said Beeston. "An average appraisal is between $450 to $650 depending on where you live and the type of property so qualifying and utilizing the waiver can save you a good amount of money."

Some lenders waive the valuation for low-risk transactions or for strong borrowers who have significant equity. Others may waive the application fee, especially for current customers.

"I have seen homes with as little as 10 percent equity qualify for an appraisal waiver so it is always a good idea to ask your lender," said Beeston, adding that obtaining a waiver can speed the refinance and remove some of the stress associated with the process.

Remember to shop around

Comparison shopping is also critical for homeowners hoping to save money on a refinance, says Chris Birk, director of education for Veterans United Home Loans.

"Rates and fees can vary significantly, and some lenders can bury costs in the fine print that wind up swelling your loan balance and reducing the impact of the refinance," Birk explained. Understanding all of your mortgage options is also a key part of ensuring you're getting the best deal possible."

Look for lenders you trust that are willing to run the numbers to help you find the best fit for your unique situation and goals, said Birk.

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