You need equity and money to refinance a mortgage, however, you can refinance without paying all closing costs up front. You might choose to pay your refinance closing costs with proceeds from the new loan, which involves tapping into part of your home's equity. However, homeowners who don't have enough equity to refinance and pay the closing costs can cover them another way -- by obtaining a higher interest rate -- also known as a no-closing-cost refinance.
"Waiving" Closing Costs "Good-Bye"
A no-closing-cost refinance actually means that lenders "waive" their own closing costs and cover necessary third-party services fees, such as title and escrow, on your behalf. "No" closing costs more accurately means "lender-paid" closing costs. Rather than pay closing costs up front in a one-time lump sum payment, you pay the lender over time to cover the costs for you. Despite lender offers that tout "no closing costs," all refinance transactions involve fees and lenders rarely refinance mortgages for free.
Typical Refinance Fees
Refinance transactions pay mortgages off with new loan proceeds and they involve most of the same fees as a home purchase. The refinance process incurs lender charges, such as loan origination and appraisal fees, plus escrow and title insurance costs. Combined, lender and third-party service fees total 1 percent to 2 percent of the loan amount, which equals several thousands of dollars on a typical, $200,000 mortgage. When shopping for a refinance, ask each lender for the terms of their "no-closing-cost" or "no-cost" refinances, as lender rules may vary.
Know What "No Closing Costs" Covers
Find out the refinance fees you must cover on your own. Many no-closing-cost lenders require you to pay appraisal fees out of pocket and before the appraisal inspection to ensure the third-party appraisal company receives payment, whether or not you follow through with the refinance. Also, lenders may require you to pay for your credit report, too. Typical appraisal fees equal between $300 and $400, but may exceed this amount on two- to four-unit properties, rentals and follow-up appraisals, or "re-inspections." Credit reports cost about $50. Review the Good Faith Estimate all lenders must provide within three business days of your mortgage application. Fees with the acronym "POC" beside them are "Paid Outside of Close," generally, by you.
Carefully Consider the Trade-Off
Expect to pay more for a refinance with no closing costs. Lenders make up for the fees they waive and the third-party fees they cover by charging you a higher interest rate. This allows them to recover the money over several years' time through higher monthly payments. Ask lenders to provide your monthly payment on a no-closing cost loan in comparison to your monthly payment on a regular closing-cost loan. They also must provide your interest rate for both refinance scenarios so that you can compare and decide whether a no-closing cost loan is right for you.
- Bankrate: Is No-Closing-Cost Mortgage For You?
- US Money News: Why You Should Think Twice Before Refinancing
- Appraisal Press: http://www.appraisalpress.com/news/articles/state_and_regional_fee_comparison
- Realtor.com: What You Should Know About the Appraisal Process
- Mortgage-X: Closing Costs: Credit Report
- Broker Outpost: Understanding a Good Faith Estimate
- The Federal Reserve Board: A Consumer's Guide to Mortgage Refinancing: What is "No-Cost Refinancing?"