Can you purchase a home or refinance your existing mortgage and not pay anything to do so? The simple answer is yes, but it definitely needs more explaining. There are costs associated with every purchase and refinance; the question is how they are paid. The best way to illustrate how a “no-cost” loan works is by providing an example of how interest rates are and can be quoted on a daily basis. This is not a real-time quote, but it can be quite typical in how market rates and cost/credits work.

Assuming a $400,000 loan amount, the total non-recurring closing costs associated with refinancing would be approximately $2900. A typical rate quote would look like the following:

  • 4.25% costs .25 points ($1000) plus all closing costs ($2900). Net cost to refinance = $3900. Mortgage payment: $1967.76. APR 4.333%.
  • 4.375%, no points, provides a Lender Credit of -.5% ($2000) to be applied towards closing costs. Net cost to refinance = $900. Mortgage payment: $1997.14. APR 4.394%.
  • 4.5%, no points, provides a Lender Credit of -1.0% ($4000) to be applied towards closing costs*. Net cost to refinance = 0. Mortgage payment: $2026.74. APR 4.500%.

As you can see, you can elect for a higher interest rate to cover the closing costs. The closing costs are still a very real part of the loan, but you are essentially paying for them through the higher interest rate and are getting a “no cost” loan.  Beware of companies that attempt to get your business by saying that there are no fees – there are always fees associated with any purchase or refinance loan. You should always be given options and have an understanding of the true cost of the loan and how those fees are being paid.

Most homeowners prefer not paying the costs associated with refinancing, especially because it gives them freedom to refinance at a future date should interest rates decrease enough.  You would definitely not benefit by continuously refinancing if you are having to shell out thousands of dollars at each point.

Also, you can determine which option to select by calculating the breakeven point. For instance, if you want to compare the 4.25% rate versus the 4.375% rate, here’s how you do it:

  • The monthly payment difference between the two rates is $29.38
  • If you were to select the 4.25% rate, then it will cost you $3000 more in order to realize that monthly payment savings of $29.38.
  • So $3000 divided by $29.38 equals 102.1 months (8.5 years) before you realize the true savings of the lower interest rate. Another way to analyze this: If you sell or refinance the loan before this 8.5 year breakeven point, then you are essentially out some of the upfront cost you paid for that monthly payment savings.

For greater complexity, you can also analyze interest savings over the different options, but how you make your decision is usually based on one of two things: How long you intend on keeping the loan, and/or staying in this home, and if you have the available funds to pay closing costs every time you may refinance.