No Cost Refinance

What is a No Cost Refinance?

A no cost refinance* allows you to refinance your home without having to pay cash out-of-pocket for your closing costs. It is a great option for homeowners who are short on cash or want to save money in the short-term.

Even though you won’t be paying in cash for your no cost refinance, closing costs do not simply disappear. Instead, they are paid through a different method: during a no cost refinance, lenders will either cover closing costs by 1) increasing your interest rate, or by 2) financing them into the loan amount.

Although most homeowners know that mortgage loans (including refinances) have closing costs, you may not realize just how much money might be due at closing. Closing costs can total up to as much as 2% to 6% of your loan amount, and you may not have that much cash lying around. However, this isn’t a reason to give up on refinancing.

What Does it Cost to Refinance a Mortgage?

Closing costs on a refinance can range anywhere from 2% to 6% of your loan amount. Origination fees, such as underwriting fees and processing fees, will be collected to cover the lender’s cost of processing the loan. An appraisal fee will be collected to reimburse the appraiser for their home valuation services. There will also be title fees, such as the title search and lender’s title policy. You can also expect to see other miscellaneous fees such as a credit report fee or notary fee if you sign your loan documents remotely.

These closing costs can add up quickly, and if the money isn’t coming out of your pocket at closing, the fees need to be paid for in a different way. If your closing costs are financed, the total closing cost figure will be added to your loan amount. It will increase the amount you owe on your home, and the interest you pay on the closing costs will result in a slightly higher long-term payment.

Alternatively, you can take a higher interest rate. Because higher interest rates are associated with lender credits, the lender credit can completely offset the amount due at closing. The higher interest rate will result in higher monthly payments but saving money at closing can still be a great financial decision.

Why Would Someone Get a No Cost Refinance?

A no cost refinance gives you a significant amount of savings in the short-term because you can refinance your home without spending a dime at closing. However, whether a no cost refinance is the right fit for you depends on whether the short-term savings are worth the higher long-term cost.

If you are refinancing your forever home and plan to own it for many more years, then you will likely pay more in the long-term with a no cost refinance. After years of making higher mortgage payments due to your increased interest rate or loan balance, you will eventually pay more than if you paid the closing costs yourself.

It is important to think about your “break-even” point with a no cost refinance. The “break-even” point is how much time it will take for you to recoup your upfront cost via monthly savings. For example, if you pay $5,000 in closing costs and have a savings of $150 per month, then it would take you nearly 3 years to recoup your upfront investment. If you plan on staying in the home for longer than 3 years, then it would make sense to pay the $5,000 at closing.

There can be a few exceptions to this general rule! If you use the short-term savings to make home renovations or pay off other forms of debt, then the higher mortgage payments could be a worthwhile tradeoff. Similarly, if you plan to refinance again within a few years, then it would make a lot of sense to refinance at no cost.

Lastly, if you can have your closing costs covered by a lender credit and still lower your interest rate from your current mortgage, then the no cost refinance would be a great option.

Requirements for a No Cost Refinance

Although the requirements for a no cost refinance are the same for rate and term and cash out refinances, you also must factor in the higher interest rate and/or larger loan amount into qualification.

Rate and Term Refinance

A rate and term refinance allows you to save money on your monthly payments by lowering your interest rate or changing your loan terms. For conventional rate and term refinances, you must have at least 3% equity in your home and have a credit score of at least 620.

Cash-Out Refinance

Cash out refinances allow you to access cash by tapping into your home equity. For conventional cash-out refinances, you must maintain at least 20% equity in your home and have a credit score of 620. In a cash-out refinance, you take a larger loan amount in exchange for cash. If you also receive the cash-out refinance at no cost, then expect to see your monthly mortgage payment increase.

How Much Cash Can I Get with A No Cost Refinance?

During a no-cost cash-out refinance, you are exchanging your current mortgage loan for a larger mortgage loan and receiving cash in the process.

How much cash you receive will depend on your equity, which is how much of your home you own. For example, if your home is worth $500,000 and you owe $200,000 on your mortgage, then your equity would be 60%.

Most cash-out refinances require you to keep at least 20% home equity after the cash-out is complete. If your refinance is “no cost” due to taking a higher interest rate, then your loan amount and equity will not be affected, and the amount of cash you can access will not change.

However, if you chose to roll the closing costs into your loan amount, then the amount of money you owe on the property will increase and your equity will decrease. This will slightly lower the maximum amount of money you can receive from a cash out refinance.

Pros & Cons of a No Cost Refinance

Pros

No Money Spent at Closing

If you are short on cash but still want to refinance, then a no cost refinance is a great option. It allows you to keep money in your savings account and cover closing costs in a different way.

Free Up Cash for Renovations

The money you save upfront on a no cost refinance could be put into other projects, such as home renovations. The improvements would increase your home’s value, making the long-term cost a worthwhile investment.

Short-Term Savings

A no cost refinance will save you money if you plan to sell or refinance your home again soon. You may receive a lower monthly payment when you pay closing costs out-of-pocket, but it could take many years to recoup the cost by just mortgage payment savings alone.

Cons

Higher Monthly Payment

When you receive a no cost refinance, the closing costs will either be covered by taking a higher interest rate or by including the fees in the loan amount. Both a higher interest rate and a larger loan balance will result in higher monthly payments compared to a refinance where you pay closing costs out of pocket.

Greater Long-Term Cost

If you are refinancing your forever home and don’t plan to sell anytime soon, then you will end up paying more money in the long-term than if you paid closing costs out-of-pocket. Your higher monthly payments will add up over time, and you will eventually pay more than if you paid closing costs yourself.

How Does a No Cost Refinance Work?

No cost refinances work the same as rate and term and cash-out refinances. The difference is that you will pay no closing costs out of pocket.

This doesn’t mean that closing costs disappear. They still need to be paid in some way!

Your lender will either include add the closing costs to your total loan amount or increase your interest rate to cover the cost of the refinance. If your closing costs are added to your loan amount, then the total amount you owe and pay interest on will increase.

If your lender gives you a higher interest rate to cover closing costs, then your loan amount will remain the same. The lender credit associated with the higher interest rate will cover all cash-to-close.

How Long Does a Refinance Take?

Refinances take about 30 to 45 days to complete from start to finish. The first step is to reach out to one of our JVM Lending loan experts to discuss your goals with the refinance. After the initial conversation, you will complete an online loan application and submit your financial documents such as paystubs, tax returns, and W-2s.

Your interest rate will be locked in, and we will submit your loan file to underwriting for approval. At this time, we will order an appraisal to assess your home’s value.

Close out your refinance by signing your closing documents, including the Promissory Note with your new loan terms, at a final signing appointment. Your new loan will pay off your previous mortgage, and the refinance will be complete!

Does a No Cost Refinance Make Sense For You?

There is no one-size-fits-all for mortgage financing. The best way to determine whether a no cost refinance makes the most sense for you is to have one of our mortgage experts at JVM Lending complete a free refinance analysis. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.

*No Cost Refinances are not available for Oregon State consumers.