No-closing-cost refinancing

"No closing cost" does not erase the fees. It moves them into one of three places: a higher rate, a larger loan balance, or a lender credit that is priced into the rate. Which structure you were offered is the entire decision, because each one costs a different sum over the loan's life. The Freddie Mac averages in the table below show the benchmark a no-cost rate is quoted against. The lowest rates are only available to the most qualified applicants.

The three structures, defined

**Lender credit.** The lender covers the closing costs and recovers them through a higher rate. It is the most common structure. Nothing is due at closing, and every monthly payment is larger.

**Fees added to principal.** The closing costs join the loan balance. Nothing is paid upfront, and you pay interest on the fees for the entire term. Across 30 years, this is the costliest of the three.

**Genuinely waived fees.** A few lenders drop specific charges on specific products. Ask which fees are truly waived and which were simply repriced into the rate.

• Request both rates in writing, one with costs paid at closing and one with costs financed, as a rate-and-fee comparison.
• Calculate the break-even: how many months of the smaller payment recover the fees you avoided.
• Divide total fees by the monthly saving to get that month count.

Source: Freddie Mac Primary Mortgage Market Survey, published at freddiemac.com/pmms. These are national averages for conforming loans. What you are quoted depends on your credit profile, points paid, loan amount and property.

The national rate backdrop

Freddie Mac publishes the actual average mortgage rate every week. A no-closing-cost quote normally sits above that average, and the spread is the price of the structure. Without the published benchmark, you cannot tell a good rate carrying a fee from a poor rate sold as convenience.

When the trade is worth it

It pays off if you expect to move or refinance again before the break-even point, because you never recoup the fees and you paid none upfront. It also makes sense when the cash genuinely is not there and the only alternative is skipping the refinance.

It makes little sense if you intend to hold the loan to maturity. Across thirty years, a fraction of a point on a large balance outruns the closing costs many times over.

The fees that are never truly waived

Several costs belong to third parties and no lender can waive them: appraisal, title search and title insurance, recording fees, prepaid interest, and escrow funding. A no-cost offer usually absorbs the lender's own origination and processing charges, then leaves the third-party costs for you at closing or rolls them into the balance. Ask for the cash-to-close number, the actual amount you must bring, and do not accept "zero cost" as the answer to that exact question.

Ask as well which costs are covered and which were repriced into the rate. A lender that drops a $900 origination fee for an eighth of a point on a $400,000 balance has given you nothing. It has lent you $900 at an effective rate of several hundred per cent.

Negotiating against the published average

Published national averages are leverage, since they reflect what the market actually priced that week. Get at least three rate-and-fee quotes on the same day so they line up, request from each lender the rate with costs financed, the rate with costs paid, and the cash-to-close for both, then show the cheapest to the others. This is ordinary comparison shopping, and it works because lenders assume most borrowers will not bother.

In Canada the comparison follows the same logic but the products differ. Ask each lender for the rate, the term, whether it is fixed or variable, and the penalty for breaking the mortgage early. In Canada that penalty can be calculated on an interest-rate-differential basis, and on a fixed-rate mortgage it can be very large.

Break-even is not the only test

Break-even tells you when the fees come back. It says nothing about whether the new loan is better overall, because resetting the amortisation clock restarts thirty years of interest. With nineteen years left, refinancing into a fresh thirty-year term drops the payment sharply while total interest can climb even at a much lower rate.

Compare the two schedules on total interest remaining, not on the payment. The refinance break-even calculator returns fee recovery; the loan payment calculator returns total interest for each structure. Run both and compare the totals.

What to request in writing from each lender

Get four numbers from every lender: the rate with costs paid at closing, the rate with costs financed, the cash-to-close for each, and whether either rate carries a prepayment penalty. Those four figures put the offers on equal footing, and requesting all four is the most effective single move a borrower can make.

If a lender will quote only one structure, ask what the other would cost. Reluctance to quote both tells you something about how the offer is priced.

A comparison you can run yourself

Take the two rates you were quoted and the closing costs you would otherwise pay. Open the refinance break-even calculator on this site, enter your current payment, the new payment under each structure, and the costs. It returns the months needed to recover the costs plus cumulative savings at 12, 24, 36 and 60 months, which is the comparison that matters.

The question that exposes the structure

Ask every lender for the same three numbers on the same day: the rate with costs paid at closing, the rate with costs financed, and the cash-to-close under each. Those three figures identify the structure immediately. A lender credit shows up as a higher rate with a small cash-to-close. Fees added to principal show up as the same rate with a larger balance. Genuinely waived fees show up as the same rate and the same balance.

A lender that will quote only one structure has answered the question already. The published average is the counterweight. If the no-cost rate sits far above the Freddie Mac average in the table above, the gap is what you are paying for the convenience, and it is payable every month for as long as the loan stands.

Sources for every figure on this page

Related reading

• Mortgage refinance costs
• Refinance break-even calculator
• Home equity costs