I’m Michael DiVita (DRE #01372066 | NMLS #241655), DiVita Home Finance (DRE #01818285 | NMLS #323700), Tiburon, CA. I’ve been in California mortgage lending since 2000 and founded DiVita Home Finance in 2007. When the bank says no, I find a way. Call (800) 239-1103.
The short answer: a no-cost refinance is real, but it isn’t free. There are always closing costs. In a no-cost refinance, the lender gives you a credit to cover them, and you pay for that credit with a higher interest rate. On a $500,000 loan, taking 6.875% with no costs instead of paying $3,500 to get 6.5% costs you about $124 more a month, so the break-even is about 28 months. If you’ll sell or refinance again before then, no-cost wins. If you’ll keep the loan longer, paying the costs wins.
There’s Always a Cost. The Question Is Who Pays It.
You can always do a no-cost refinance. But the reality is it comes at the expense of a higher rate. Every refinance has closing costs: lender fees, appraisal, title and escrow, recording. In a “no-cost” loan, those costs don’t disappear. The lender covers them with a lender credit, and in exchange you take a slightly higher rate. So there’s always a break-even point, and that’s the number that should decide which way you go.
The Math on a $500,000 Refinance
| No-cost option | Pay-the-costs option | |
|---|---|---|
| Loan amount | $500,000 | $500,000 |
| Rate (30-year fixed) | 6.875% | 6.5% |
| Closing costs | $3,500, covered by a lender credit | $3,500, paid by you |
| Monthly principal and interest | $3,284.64 | $3,160.34 |
| Difference | $124.30 a month more for the no-cost loan | |
| Break-even | $3,500 ÷ $124.30 = about 28 months | |
Here’s how the extra payment adds up on the no-cost loan:
| After | Extra paid on the no-cost loan | Better deal |
|---|---|---|
| 12 months | $1,492 | No-cost (you saved $3,500 up front) |
| 24 months | $2,983 | No-cost, barely |
| 28 months | About $3,500 | Break-even |
| 36 months | $4,475 | Paying the costs |
| 60 months | $7,458 | Paying the costs |
| 10 years | $14,916 | Paying the costs, by a lot |
Principal and interest only, 30-year fixed, for illustration. The lower rate also pays down your balance slightly faster, which moves the true break-even a little earlier. Your actual rates, costs and credit depend on your loan.
When a No-Cost Refinance Makes Sense
- Rates are falling and you may refinance again. With no costs in the loan, you can refinance again when rates drop further without losing what you paid the first time.
- You expect to sell within about two years. If you won’t reach the break-even, paying the costs is money you won’t get back.
- You’d rather keep your cash. Some borrowers want the lower payment from a refinance without writing a check at closing.
When Paying the Costs Makes Sense
- You plan to keep the loan for years. Past the break-even, the lower rate saves you money every month for as long as you have the loan.
- Rates are near a low. If you don’t expect to refinance again, lock in the lowest rate you can. That’s what I did on my own home in 2021.
When I Paid Points, and Why I Wouldn’t Today
When I bought my own house at the end of 2021, I paid the closing costs plus additional points to buy my rate down below 3%. Why? I knew rates were going up and were unlikely to come back below 3%. When rates are near a low, paying to lock in the lowest possible rate makes sense, because you’re never going to want to refinance away from it.
Today it’s the opposite. Rates are high right now. Nobody knows exactly where they’re headed, but if they come down, you’ll want to refinance, and any points or costs you paid will be money left on the table. If you take the no-cost loan and refinance again early, you haven’t lost anything: you never paid anything up front. That’s why, at today’s rates, I usually lean toward a no-cost refinance. It keeps your options open.
What a No-Cost Refinance Usually Doesn’t Cover
A lender credit is usually sized to cover closing costs. Prepaid items are different: funding a new escrow (impound) account for property taxes and insurance, and prepaid interest to the end of the month. That’s your own money for taxes, insurance and interest you’d pay anyway, and you often get the old escrow balance refunded from your current loan. Ask for a Loan Estimate that shows the lender credit and the prepaids separately so you can see the real out-of-pocket.
How I Run This for Clients
I price the same loan both ways, and often a couple of options in between, across my wholesale lenders, then show you the monthly difference and the break-even in months. Then the decision is simple: how long will you keep this loan? This applies whether you’re in Los Angeles, the Bay Area or anywhere else in California. See also refinancing in California and California closing costs.
Frequently Asked Questions
Is a no-cost refinance really free?
No. The closing costs are still there, but the lender pays them with a lender credit, and you pay for that credit with a higher interest rate. You pay over time instead of up front.
How do I calculate the break-even on a no-cost refinance?
Divide the closing costs you’d avoid by the extra monthly payment at the higher rate. On a $500,000 loan, $3,500 in costs and a payment $124.30 higher at 6.875% than at 6.5% gives a break-even of about 28 months.
When is a no-cost refinance a good idea?
When you expect to sell or refinance again before the break-even, often when rates are falling, or when you want a lower payment without bringing cash to closing.
What is a lender credit?
Money the lender puts toward your closing costs in exchange for a higher interest rate. The bigger the credit, the higher the rate.
Does a no-cost refinance cover escrow and prepaid interest?
Usually not. Lender credits are typically sized to cover closing costs. Funding a new escrow account and prepaid interest are separate, and your old escrow balance is often refunded after the old loan is paid off.
Related Resources
- Mortgage Refinancing in California
- California Closing Costs
- Buydown Mortgages in California
- How Mortgage Rate Locks Work
- Why Mortgage Rates Change Daily
Talk to Michael Directly
DiVita Home Finance | Tiburon, CA | In lending since 2000, founded DiVita Home Finance in 2007. Michael DiVita DRE #01372066 | NMLS #241655. Company DRE #01818285 | NMLS #323700.
💬 Text: (310) 849-9124
