One of the most eye-catching phrases in the highly competitive refinancing space is, "No closing costs!" Lenders who boast of this option are playing freely with language, but their loan will not be free to set up. Let's look at how those "no closing cost" refinance loans really work.

No real estate transaction is free. Too many entities are involved, and regulations must be followed. Lenders who advertise a no-cost refinance are either speaking solely of upfront costs without saying so, or will be waiving a charge or two and exaggerating the gesture for the oomph it adds to their advertising.

Some Costs Cannot Be Waived

Most of the costs associated with a real estate transaction are third-party charges and fees. These one-time costs must be paid no matter who the lender is (although you can shop around to get the lowest price on some items):

  • Appraisal
  • Title and escrow fees
  • Notary
  • County recording

Someone must also pay for underwriting, processing, and document preparation. And let's not forget the property tax. Altogether, closing costs average 3%-5% of the loan amount nationwide.

Lenders who offer to cover the closing costs on your behalf have not been overwhelmed by the spirit of generosity. They must be planning to be repaid some other way, a way that does not involve opening your wallet right now. For example, by adding 0.5% to your interest rate, or tacking the costs onto your loan balance.

Strictly speaking, you paid no closing costs in this scenario, but did you save money? No, you did not. In fact, you would have saved the most by paying the closing costs out of pocket.

Rolling the Costs Into the Loan Increases Them Rather Than Eliminates Them

Out of sight, out of mind. That's what lenders think you will believe when they advertise "no closing costs." The truth behind the phrase is that you will be required to pay the costs later instead of now. The costs will be added to your loan balance.

Rolling the costs into the loan only kicks the can down the road. Not only will you pay every cent of the closing costs eventually, but you will also pay interest on the amount.

For example, let's say you refinance $250,000 to pay off a mortgage that has 21 years left on the term. Lured by the prospect of paying no closing costs, you go with a lender who rolls the $7,000 in closing costs into the balance so you won't need to pay them out of pocket. Your new mortgage matches the length of the mortgage it is replacing, 21 years, and the kicked-up balance is $257,000.

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What is the long-term effect of rolling the closing costs into the loan? This table shows how much that $7,000 grows when you accumulate interest on it over 21 years.


Interest Paid on 3.49% Loan Over 21 Yrs With & Without Closing Costs
BASE LOAN CLOSING TOTAL LOAN MO. PYMT TOTAL INTEREST
$250,000 Cash up front $250,000 $1,401 $103,052
$250,000 $7,000 $257,000 $1,440 $105,937

So, if you go with the "no closing costs" option and choose to roll them into the loan (out of sight, out of mind), each payment increases $39 for all 21 years. In the end you will have paid $2,885 more in interest because you tacked $7,000 onto the balance, in effect paying 41% more for closing costs than you would have paid up front.

Remember when your eyes first landed on the phrase, "No closing costs"? Well, now you understand that paying 41% more for closing costs over time is hardly the same as paying no closing costs. In advertising, what sounds too good to be true often is. Ready to explore all your refinance options? Lendgo can match you to a high-quality lender today!