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No Closing Cost Refinance vs Refinance with Costs

What you'll learn: No Closing Cost Refinance vs Refinance with Costs


No Closing Cost Refinance vs Refinance with Costs

When researching mortgages, you may see lenders offering a no-cost refinance option. Wait, a zero-closing cost refinance? Who wouldn’t choose that option? Especially with closing costs averaging between two and six percent of the loan amount – saving thousands of dollars of upfront expenses certainly sounds appealing.

Not so fast. While a no-cost refi does offer definite advantages to some borrowers, they’re not right for everyone. And there's more to zero-cost refinancing than meets the eye, so let's take a closer look to see how it works.

Closing costs to refinance a mortgage

First, let’s look at the typical refinance closing costs. Because a refinance replaces your current mortgage with a new loan, there are fees to cover the many services that are provided throughout the process. Here are some of the most common refinance closing costs:

  • Origination Fees – Include lender services such as underwriting, credit checks, home appraisal, processing, mortgage points, and other administrative tasks
  • Title Fees – Cover title-related items like title search, insurance, and settlement
  • Prepaid Home Costs – Include insurance premiums, property taxes, and homeowners association (HOA) fees (if applicable)
  • Mortgage Insurance – If required, such as with Federal Housing Administration (FHA) loans and conventional mortgages with less than 20 percent equity
  • VA Funding Fee – Required with a Veterans Affairs (VA) loan

How to refinance without closing costs

Contrary to what the name implies, a no closing cost refi doesn’t eliminate closing costs. It simply takes them from an upfront payment and rolls them into the loan. Depending on what your lender offers, the costs can be absorbed in different ways:

  • Higher loan balance – In this case, your lender will take the total amount you would have paid in closing costs and add it to the principal of your loan. For example, a $175,000 loan may become a $180,000 loan.
  • Higher interest rate – Instead of a higher principal, you may be offered a higher interest rate. That could mean a rate of 6 percent instead of 5.5 percent, increasing your monthly mortgage payment and how much you pay for the loan.

Do these sound like good trade-offs? Let’s look at some numbers to help you decide.

Crunching the numbers

For these examples, we’ll pretend you’re looking to refinance a $175,000 loan at a fixed rate for 15 years. The closing costs are estimated to be 3 percent of the loan, or $5,250.


Refinance With Closing Costs

No-Cost Refinance: Higher Loan Balance

No-Cost Refinance: Higher Interest Rate

Loan Amount




Closing Costs




Interest Rate




Monthly Payment




Total Paid in Interest




Total Paid for Principal & Interest




The two zero-cost refinance options avoid an upfront payment, but they increase the monthly mortgage payment and the overall cost of the loan. A rate increase of just half a percentage point leads to paying almost $8,500 more for the loan. Even after you subtract the closing costs, that’s still over $3,000 more.

Keep in mind, many factors can affect your payments and the numbers won’t always work out the same way. Be sure to work with your lender to understand your loan quotes.

So, which option is best?

As you can see, each option has its benefits and drawbacks. The best option for you will depend on your financial situation. Below are some general guidelines to help you decide.

Reasons to consider a refinance without closing costs:

  • You don’t have the upfront cash available or need it for something else
  • You plan to sell your home in the near future, making it not worth it to pay the full closing costs
  •  Paying less upfront is more important to you than saving per month or over the life of the loan

A refinance with costs may be better if:

  • You have the cash available to cover closing costs
  • You plan to stay in your home for the foreseeable future
  • You want to pay less per month and for the loan overall

Moral of the story: “No closing cost” refinancing doesn’t really mean zero closing costs ever. It’s simply a way of managing how those costs are paid. Depending on your situation, this approach may work in your favor. As always, be strategic about how and when you refinance – so you can stay in the driver’s seat with your finances.

Reach out for more refi resources. Visit the PenFed Mortgage Knowledge Center.


  •  Call 866-386-7254
  • Visit

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1Rates are updated daily at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.