No Closing Cost Refinancing, Is It Right For You?

On most refinances you can choose to have your lender pay for all your Non-Recurring Closing Costs. This is often referred to as a No Points No Fees (NPNF) Refinance.

 In order to get a No Closing Cost Refinance you will need to accept a slightly higher rate than a normal No Points mortgage. Usually about .250% to .500% higher.

Non-Recurring Closing Costs include the following: Appraisal Fee, Credit Report, Lenders Fees, Broker Fees, Title Insurance, Escrow Fees and Recording Fees.

Items that do not qualify as Non-Recurring Closing Costs are Property Taxes, Interest, and Insurance. See the chart below to see if it is right for you. Request A Free Rate Quote.

Is a No Cost Loan Right for You?

If you are planning to own the property less than five years, or if you are short on cash to close on a purchase, then a no cost loan could be right for you.  It is easy to calculate your break-even point by simply looking at the difference in your payment for a no cost loan vs. a loan with costs and then dividing that difference into the amount of non-recurring closing costs that you would have to pay at closing.  The result of this calculation will tell you how many months it would take to re-coup the expense of the closing costs so you can then compare that time frame to the length of time you anticipate living in the property.

Detailed Article and Analysis

No closing cost mortgages have existed in the mortgage industry for over 15 years, I recall first being introduced to them in the early 1990's.  However you frequently hear this loan product referred to recently as if it were new or unusual which it is not.  No closing cost loans have gained popularity across the country during the refinance markets of recent years as a result of swelling property values and the consequently increasing loan amounts. Note that many lenders will not do a no cost loan for loan amounts under $250,000.  Today, due in part to unscrupulous lending practices occurring in the sub-prime market, lenders are appropriately under increasing scrutiny and consumers are now leery of all seemingly questionable lending activity.  Therefore given the current state of high alert in the lending industry in general, consumers are on guard and looking for misleading information being dispensed by lenders.  However there shouldn't be much concern in the area of no cost loans as long as you, the consumer/borrower, are paying attention and doing your homework to make sure that the no closing cost mortgage is a) what you really want and b) what you are really getting from your lender and you should do just fine.


Compare No Cost Refinance
No Points, No Fees Option B Option C
Loan Amount
Interest Rate
Base NR Closing Costs
Total NRCC's
Monthly Payment
Savings Per Month vs. Option A
Months Required To
Break Even
Years Required To
Break Even

No Cost Loan Comparisons

Let's look a scenario outlined above comparing a no cost loan with a zero point loan. You are considering two options offered on a $300,000 loan. Option A is a no cost loan with a rate of 6.25% and a payment of $1,847 compared to option B, a zero point loan with base non-recurring closing costs of $2,800 and a rate of 6.00% and a monthly payment of $1,799. The difference in payment would be $49 per month and if you divide this difference into the base closing costs of $2,800, the months to required to break-even (BE) or re-coup the costs is 57.73 months. Divide the number of months by 12 to annualize the equation and it would take 4.81 years to re-coup the costs of the zero point loan vs. the no cost loan. Taking the no cost loan here seems to make the most sense.

Now let's compare the no cost loan to a loan with base closing costs as well as points. Option A again has a 6.25% rate and is at no cost. Option C has a rate of 5.75% at 1 point plus base closing costs of $2,800. The payment under option C would be $1,751 and the total non-recurring closing costs (NRCCs) with the point would be $5,800. The payment under option A is $1,847 with the non-recurring closing costs (NRCCs) being paid by the lender (or already included in the rate). The difference in payment would be $96 per month and divided into the $5,800 in closing costs would equal 60.15 months, which divided by 12 to annualize, would then take 5.01 years to break-even. Given the time value of money and the fact that a homeowner will likely refinance within 5 years, once again the no cost loan is a make sense option.

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Loan Costs Defined

No closing cost mortgage are also referred to as no point, no fees loans (a more accurate description) or no cost mortgage refinance are really simple to understand once you learn a little loan lingo along with some mortgage industry terminology. First it is important to note that all loans have costs associated with them and these costs generally fall into three categories:

Points – are essentially pre-paid interest on a loan. They are sometimes called discount and origination fees. Discount fees are points paid to the lender who actually funds the loan and the origination fee goes to the lender or broker who processes the loan. For example one point equals 1% of the loan amount, so on a $300,000 mortgage 1 point is $3,000 and 2 points, $6,000. Simple concept.

Non-recurring Closing Costs (NRCCs) – these include appraisal, credit, title, escrow, notary, recording fees, lender “garbage fees” which can include: document preparation fees, underwriting fees, administration fees, processing fees and the like. Points may also be included in this category as well. These are fees that are associated directly with obtaining the loan and are fees you would not otherwise be paying for outside of the loan process. When points are excluded from this figure, the total may also be referred to as a borrower's base closing costs.

Recurring Closing Costs – they are your current mortgage interest, property taxes and insurance. These are fees that you would otherwise have to pay regardless of whether or not you were applying for a new loan and are not true costs of obtaining a loan but may be required to be paid at closing anyhow because of the timing of the loan closure as well as when these costs would normally need to be paid. I strongly recommend paying these costs out of pocket because to do otherwise would mean financing any pro-rated interest, property taxes and homeowners insurance (costs which are already due and payable and you should have budgeted to pay for anyway) over 30 or 15 years, at a huge interest expense to you.

Loan Costs, Who Pays Them?

Now that we have outlined the costs involved in obtaining a loan, let's examine how they might be paid for:

Borrower (you presumably) – they could be included your loan amount (only if you are refinancing not purchasing) or you could pay them out of pocket by writing a check to the title or escrow company at the time of closing.  You could also take a higher interest rate on a refinance loan and have your lender pay some of these costs.  (see Lender below)

Seller – in a purchase transaction a seller could provide an NRCC (non-recurring closing cost) credit to help cover a buyer's closing costs.  Note the seller may normally pay for the non-recurring but not the recurring closing costs of a buyer.

Lender – the lender can use what is call the yield spread premium (YSP) through an increase in a borrower's interest rate to pay for their NRCCs (non-recurring closing costs).  For example on a loan amount of 300,000, let's estimate that the NRCCs are equal to about $2,800.  The lender can increase the rate so they receive an additional point, this would typically require a .25% increase in rate to raise the lender's yield spread premium by one full point. And as earlier discussed, a point equals 1% so in this case, $3,000 to cover the borrower's $2,800 in non-recurring closing costs.  The lender would then likely keep the additional $200 as added profit on the loan.

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Confused? Don't Be

The no closing cost loan is not the same as a no out-of-pocket costs loan where the closing costs are simply wrapped into the loan amount.   This is a frequent misconception.  Another is the no lender fee loan where the lender simply waives or covers their own garbage fees (recall garbage fees are typically called document preparation, underwriting, processing and administration fees) and this is not the same as a no cost or no point-no fee loan.  The best way to determine whether your loan is truly a no cost loan is to simply verify the current outstanding loan balance(s) on your existing loan(s) to be paid off so that it is equal to (or very close to) the same as your new loan amount and make certain that the only fees you are paying out of pocket are the recurring costs of interest, taxes and insurance due.  Next add up all the remaining non-recurring closing costs (NRCCs) on the estimated closing cost statement and make sure you are receiving a credit from your lender equal to that total amount.

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Refinance at Today's Low Rates!

When a no cost loan may not make sense

When the seller in a purchase transaction is paying all or some of a buyer's NRCCs, the buyer will want to be sure to use all the money the seller has offered, leaving no money on the table, and this could involve paying some points and closing fees to do so. It is also important to note that in doing your break-even analysis, if you come up with a number of 3 years or less, you may want to consider the alternative to the no cost loan if you plan to stay in the property for 5+ years. It is also extremely important to note that if, as a homeowner, you continue to roll down your rate during each and every refinance market that you own your home, continually re-extending your loan term out again another 30 or 15 years, you will likely never pay off your loan. At some point you must consider that you are far enough into the term of the loan, that you are paying mostly principal rather than interest, and to re-extend the term again could be foolish.

Don't Get Blindsided by Real Estate Garbage Fees

by Nancy Osborne, COO of ERATE

Because of an Alabama case which has been tossed back and forth between the Appellate and District Courts, the issue of what constitutes a legitimate consumer "garbage fee" in the real estate industry is now under the microscope. We are all familiar with these indescribable fees which mysteriously show up unexpectedly at the title company on our closing statements at the 11th hour when there is little time left to debate them. Of course this is precisely what the real estate professionals are counting on, that rather than fighting and contesting a charge, a consumer will go ahead and bite the bullet and pay it. Fortunately for consumers this lawsuit, which has been kicked back to the District Courts after being reviewed by the Appellate Court, serves to reinforce industry compliance with a rule by the Department of Housing and Urban Development (HUD) stating that all fees incurred as a result of a residential real estate transaction must be reflective of actual services rendered in the transaction. Therefore fees unrelated to a transaction which have been thrown on at the last minute to boost a real estate agent's per transaction income are unlikely to meet this criteria.

It is important to note that all fees generated in real estate are typically negotiable in advance and it is essential to request a written estimate before committing yourself to any one agent.  Then you have a reference point for comparison when you receive your estimated final statement at the time of closing and if anything you weren't anticipating has cropped up unexpectedly you should contest it.  One way of looking at many of these types of fees is that they could be considered a form of transfer payment.  In essence, when a consumer is willing to pay more in the way of one particular form of compensation, the less they may end up paying of another form.  Therefore it is always a good idea to take the total amount of compensation you are paying in connection with a transaction into consideration and to arm yourself with as much information as possible which should include getting at least several written quotes from several sources up front prior to making any commitments.

Another No Cost Loan Article from our Writers
No Closing Cost Home Loan - Saving you Money and Pain?

You've found the perfect home. You've found the perfect price, or the perfect refinancing opportunity. But have you remembered everything?

Closing costs are the end of the line for homebuyers, the last hurdle before mortgage completion. Unfortunately, they can be a burden, totaling thousands more than some buyers might have planned for. Closing costs include title and escrow fees, appraisal, lender's fees, credit report fees, and other expenses that are non-recurring over the life of a mortgage loan.

The unexpected and expensive nature of closing costs may account for the growing popularity of a mortgage option called “no-closing-cost mortgages.”

No closing cost mortgages are billed as the perfect method for homebuyers to eradicate the pain of closing costs. But much confusion exists about how they actually work. Turns out, free doesn't always mean free.

These mortgages are based on higher rates than other mortgages that require buyers to pay all closing costs. Typically, the loans have interest rates at least 0.25 percent higher than other loans. This extra interest is reworked as a Yield Spread Premium for lenders, and acts as a fund from which closing costs can be paid.

An example: For a $200,000 mortgage, closing costs might equal $5000. A normal mortgage will require buyers to pay these closing costs out of pocket, and the interest rate for the mortgage will be 7 percent. With a no-closing-cost mortgage, buyers will not pay any closing costs out of pocket. However, the loan rate will be 7.5 percent. This results in higher monthly payments.

When is a no-closing-cost mortgage a good idea?

  • Short length of stay. If you are planning on staying in your home for only a few years, a no closing cost mortgage may be a great way to save money. Rather than shell out thousands of dollars upfront, the no-cost option can mean immediate ownership at a lower price.
  • Refinancing. If you are looking to refinance your home to save costs, a no cost refinance is ideal. Homeowners can take advantage of lower interest rates in the market, without prohibitive closing costs. In fact, if interest rates continue to decline over the years, homeowners can simply refinance again to obtain additional savings, and avoid closing costs, with this type of mortgage.

If you are looking to stay in your home for an extended period of time, no-closing-cost mortgages may not be appropriate. A lower rate provided by normal mortgages will pay off over a long period of time, and closing costs will be recouped by the savings during this time as well.

The key, then, is to crunch the numbers for your specific situation. No-closing-cost mortgages can provide great flexibility in cases where you're unsure how long you'll stay in a house. For refinancing, they provide even greater flexibility.

Remember that every lender is different and has specific stipulations for each loan. Depending on the mortgage, you may find that your no closing cost mortgage may actually involve a few fees. In some cases you may still be responsible for a few closing fees like escrow and appraisal.

Nancy Osborne, Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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