What are the Pros and Cons of Refinancing with No Closing Costs?

Refinancing with no closing costs can have some upfront benefits in the form of a reduced price to originate the loan, but will result in paying more in the long term. Borrowers should weigh their options carefully to determine if this form of refinance would be a good choice. For short-term loans, it can be an excellent way to save money. For loans that borrowers intend to hold in the long term, it may be more costly than a conventional loan.

In this type of refinancing deal, the broker or lender pays most or all of the closing costs associated with getting the loan established. Borrowers should be aware that, despite the name, refinancing with no closing costs sometimes actually includes some closing costs, like paying points on the loan. It is advisable to read the fine print of the deal carefully to determine how much money the lender expects to see from the borrower on closing day. Sometimes the loan is genuinely no cost, and in others, it is necessary to have some funds available.

Brokers and lenders offer refinancing with no closing costs with the intent to recoup the costs by charging more interest on the loan—sometimes a lot more. Borrowers should see how much they will pay over the life of the loan with different options to determine how much money they would save.

The option of refinancing with no closing costs can work for borrowers who have little or no money to cover closing costs, often because they are carrying a high debt and have not been able to save money. The refinance will bring a lower interest rate, making the loan easier to manage. Although the borrower may end up paying much more than the original closing costs in extra interest over the term of the loan, it may be the only way to access refinancing, and will still be less costly than retaining a high interest loan.

Other borrowers may want to consider refinancing with low closing costs. If borrowers do not intend to hold a loan very long because they are going to sell, pay it off, or refinance, there's no reason to incur upfront closing costs. The slightly higher interest rate will not make a big difference because the borrower won't be holding on to the loan long enough. Borrowers in this position should think about what they will do if they cannot sell or refinance. Refinancing with no closing costs could come back to haunt a borrower.