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Are You Looking for a Refinance with No Closing Costs?

Many mortgage refinance ads claim that you can refinance your home and pay zero closing costs. If that sounds too good to be true, that's because closing costs are not avoidable. All refinance loans involve closing costs to some degree.

The Myth of the "No Closing Costs" Refinance

Unscrupulous advertisers try to mislead home owners by claiming that they can offer a "free" refinance transaction when in fact they are hiding the closing costs.

Smart home owners will take the trouble to understand what closing costs are and what options exist for paying them. Closing costs can amount to several percentage points of the loan amount, so it's important to understand them. Make sure your lender is up front with you and explains your options for paying closing costs. If they tell you that there are none, or that the lender is covering all the costs for you, you should ask for a fuller explanation or walk away.

The Truth about Refinance Closing Costs

As with a loan used to purchase a home, a refinance transaction typically involves, at a minimum, the following types of closing costs:

Lender Fees	Title & Escrow	Other Fees
Origination Fee (optional) Discount Fee (optional) Loan Processing Fee Underwriting Fee Document Drawing Fee Wire Transfer Fee Some lenders may combine all of these fees into a single item.	Title Insurance Premium Escrow Fee	Appraisal Fee Credit Report Fee Recording Fee

There are three ways to pay for closing costs:

Pay your closing costs out of pocket at the time the loan closes.

Include your closing costs in the loan amount, if permitted by the rules of the loan program. Your payment will be increased slightly since the closing costs are added to your initial principal balance.

Choose to pay a higher interest rate than if you select options 1 or 2. When you pay a higher rate, your lender expects to receive extra interest over the life of your loan, making your loan more valuable to your lender, whether the loan is kept on the books or sold to another institution. Your lender may offer you a rate that is just high enough in terms of extra loan value that it compensates the lender if they pay your closing costs now (and you pay them back through higher interest fees over time).

The first option is self-explanatory. The second and third options are explained in more detail below.

Adding Closing Costs to the Loan Amount

Your lender may ask if you want to "finance" your closing costs by including them in your loan amount. This can only be done if there is enough equity in the property. If you elect to do this, you are "financing" your closing costs, or borrowing an amount necessary to pay for them currently and repaying the borrowed money (along with the rest of your loan) over the remaining loan term. For many borrowers, this is a sensible option, particularly if they are short on cash. Financing your closing costs means you do not pay the costs up front, or "out of pocket." It does not mean that there are "no closing costs."

Paying Closing Costs with a Higher Interest Rate

The second means by which you can avoid paying closing costs "out of pocket" is to agree to accept a higher interest rate. This is the method most commonly used by mortgage brokers and lenders when they claim to be able to offer a "no cost refinance." The costs are still there, and you are paying them indirectly, in the form of increased interest and monthly payments over the life of your loan. This choice generally is not the best option, due to the higher cost involved, but if you are short on cash to pay closing costs then accepting a higher rate instead of paying closing costs out of pocket can make sense.

As you can see, there is really no such thing as a "zero cost refinance." In reality all the costs are there, and one way or another they are being paid by the borrower, either up front or over the life of the loan.

Make sure that your lender is up front with you about your options for paying closing costs. Usually you should have all three options discussed above available to you, and you can decide which option is best for you.

Know Your "No Closing Cost" Refinance Numbers

At LRG Mortgage we show you all rate options, some of which involve paying closing costs out of pocket, and others involve making the tradeoff between paying no costs up front in return for accepting a higher rate. In all cases, the choice is yours, and we provide you with the information to help you evaluate this choice.

Want a refinance quote? Use the mortgage quote engine at left, or call us to discuss your refinance needs.