Are closing costs keeping you from refinancing a mortgage? If so, a no-closing-cost mortgage may be for you. With this type of mortgage, you won’t need to pay thousands of dollars in upfront fees. But, is the lender really waiving the fees, or are they offering a higher interest rate to offset those costs?

What Are Closing Costs?

Closing costs include services such as the loan origination, appraisal, credit report, escrow, homeowner’s insurance, flood certification, government recording fees, title search fees and title insurance premiums. These costs vary from state to state. According to Bankrate’s 2014 Closing Costs Survey, the origination and third-party fees have risen 5.7% to an average of $2,539. That’s a $137 increase from 2013.

When to Take the No-Closing-Cost Offer

1. Do it if you don’t have the cash to pay fees upfront and accepting a slightly higher loan payment is in your budget. This may be the answer to getting a mortgage for a new home or a refinance.
2. Take it if you don’t plan to stay in your home for more than five years. With a traditional mortgage, it could take more than five years to recoup the closing costs. Example: If you have a high interest rate loan at 5.50% and are only looking at being in the house for another four years, then going for no closing costs is a good idea.
3. Forgo closing costs if you need the cash to do renovations on your home.

To Do: Ask the lender to provide a break-even analysis. How many months before I recover the closing costs of the refinance? Also confirm the numbers yourself or look on the Internet for mortgage break-even calculators. is a good all around resource.

When It Doesn’t Pay

1. Do you plan to stay in your home more than five years? If so, a no-closing-cost loan likely will end up costing you more than a loan with closing costs. That’s true whether you’re taking out a mortgage for a new purchase or refinancing an existing loan.
2. Typically, you’ll break even on your closing costs in a few years. Accepting a no-closing-cost loan could require a higher interest rate over the rest of the term of the payments. That could end up costing you a lot more in interest and fees if you keep the mortgage for a long time.
3. Also, be careful if the rate is higher by .375%-.50%. There is a diminishing rate of return the higher the mortgage rate. Going to a .125% – .25% higher rate could be a better idea than paying some of the closing costs.

Example: Take the hypothetical example of two choices for a $150,000 loan. One has a rate of 3.75% with $3,500 in closing costs; the other has a rate of 4.25 %, with no closing costs. Going with the higher-rate, no-closing-cost option runs $43.24 a month more, or $15,567 more over 30 years. In this scenario, it takes six years and nine months to break even and recoup the closing costs via the lower monthly house payments.

Almost every lender will offer the option if you ask for it. Ultimately, it is up to each borrower’s situation to decide if the trade-off is worth it.

What to Do!

Call me, the Mortgage Fee Coach, for help in deciding what to do about closing costs.