No-closing-cost refinance

"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 that is priced into the rate. Understanding which one you have been offered is the whole decision, because each one costs a different amount over the life of the loan.

The three structures

**Lender credit.** The lender pays 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 30-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 closing costs paid and the rate with them financed, in writing, as a rate-and-fee comparison.
• Work out the break-even: how many months of the lower payment recover the fees you would have paid.
• Divide the total fees by your monthly saving to get the number of months.

Source: Freddie Mac Primary Mortgage Market Survey, as published at freddiemac.com/pmms. National averages for conforming loans; your rate depends on credit, points, loan size and property.

The national rate context

Freddie Mac publishes what the average mortgage rate actually is each week. A no-closing-cost rate is typically above that average, and the gap is the price of the structure. Without the published average you cannot tell whether you are being offered a good rate with a cost, or a bad rate dressed as a convenience.

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. It also makes sense when you genuinely do not have the cash and the alternative is not doing the refinance 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 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 being covered and which are being repriced into the rate. A lender that waives a $900 origination fee in exchange for an eighth of a point on a $400,000 balance has not given you anything: it has lent you $900 at an effective rate of several hundred per cent.

How to negotiate against the published average

Published national averages are leverage, because they are what the market actually prices at that week. Get at least three rate-and-fee quotes on the same day so they are comparable, ask each lender for the rate with costs financed, the rate with costs paid and the cash-to-close for both, then present the cheapest to the others. This is ordinary shopping, and it works because lenders price on the assumption that most borrowers do not do it.

If you are in Canada, the comparison works the same way but the products differ: ask each lender for the rate, the term, whether it is fixed or variable, and the penalty for breaking the mortgage early, which in Canada can be calculated on an interest-rate-differential basis and can be very large on a fixed-rate mortgage.

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 thirty years of interest. If you have nineteen years left and you refinance into a new thirty-year term, the payment falls dramatically and the total interest can rise even at a much lower rate.

Compare the two schedules on total interest remaining, not on the payment. The refinance break-even calculator gives you the fee recovery; the loan payment calculator gives you the total interest for each structure. Run both and compare the totals.

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 the 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. Use the refinance break-even calculator on this site: enter your current payment, the new payment under each structure, and the costs. It returns the number of months to recover the costs and the cumulative saving at 12, 24, 36 and 60 months, which is the comparison that matters.

Where these figures come from

Related pages

• Mortgage refinance costs
• Refinance break-even calculator
• Home equity costs