"No Cost" Mortgage Refinance: Stepping Down the Ladder

I posted last week that I’m refinancing my mortgage. Now I can add more details. I lowered the interest rate on my 15-year fixed rate mortgage by 0.25% from 5.125% to 4.875% using a “no cost” refi. All closing cost will be covered by the lender. In exchange, my rate is higher than what it could’ve been. If I chose to pay the closing costs, I could’ve got 4.625%.

I’ve done this quite a few times since I bought my house. Every time the interest rate drops, I exercise the built-in put option on the mortgage and do a “no cost” refi. This way I make sure my interest rate is never more than 0.25% higher than the lowest rate. I call this “stepping down the ladder.” The 0.25% number is the typical penalty on my loan amount for doing a “no cost” refi versus paying the closing cost.

I must make it clear that what I did worked for me, in the time period so far. It will not work for everybody. Nor will it work in all rate environment.

With a “no cost” refi, I don’t pay any closing cost at the time of closing. My principal balance doesn’t increase either. After the refi, I pay a lower interest rate than what I had before. I benefit from day one. It removes the biggest uncertainty for any refinancing decision making — “Is it worth the closing cost?” As long as the interest rate is lower, it’s worth it.

“No cost” refi is not really no cost in the strict sense. All parties involved in the refi still get paid. They are paid by the lender via a negative point. Similar to how paying a point buys down the interest rate, a negative point bumps up the rate from what it otherwise would be. For example this time I had a choice between

  • pay $3,000 in closing cost and refi to 4.625%; OR
  • pay nothing in closing cost and refi to 4.875%

If I choose “no cost” the lender pays the one-time closing cost up front and collects a higher interest over time. If I keep the mortgage past a break-even period, the lender becomes better off. If I don’t keep the mortgage for long, I’m better off. Theoretically if I knew which refi will be my last one and I will keep that loan for a long time, I should choose to pay the closing cost. According to the mortgage refinance calculator 3a by The Mortgage Professor, my break-even period between my two choices this time is 9 years. Because I refinance aggressively and because the rate has been falling, I’ve never held a mortgage for that long. When I refi’d last time, I thought about paying the closing cost because the rate was already low. It only lasted two and half years. I had the same thought this time. In the end I still chose to leave my options open with a “no cost” refi. Let’s see how long this one lasts.

For more info and pros and cons on “no cost” refi, please also read No-Cost Mortgages by The Mortgage Professor (link posted by Taylor Larimore in the Bogleheads forum. Thank you, Taylor.).

Refinance Your Mortgage

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  1. Anonymous says

    TBF, I am wondering how could you possbly get this rate with no points/no closing? That would get you below the wholesale. Rates do differ depending on the state, but we are talking almost a point here. Can you disclose the broker?

  2. Harry Sit says

    Rates fluctuate. I locked in my rate on 1/23/2008. The rates were low on that day. For example PenFed credit union’s rate was 4.625% then. Today it’s 5.000%.

    It sounds like you are in the mortgage business. What do you think of my strategy overall?

  3. Ted says

    Anon – I also locked the same day as tfb. I was shopping 30 year rates for a week. The perfect storm hit that day. The fed cut the rate 0.75 and the bond and stock market went wonky. I don’t know enough about markets to explain why, but mortgage rates dipped very sharply very quickly and went back up the next day and into the next week.

    PS – I got 5% on a 20 year fixed with many of the lender costs paid. Not all like tfb, however. Still, I’m cutting 8 years off my mortgage for $50 a month.

  4. I'm Grace. says

    So you’ve extended your loan by three years when you went from a 15-year loan in 2005 to a 15 year loan in 2008?

    I’m not sure I’d want to do that.

    Am I missing something?

  5. Harry Sit says


    If I follow the new amortization schedule after the refi, yes, my loan payoff date will be extended for 3 years. But I don’t have to follow the new payment schedule. If I keep paying what I used to pay before the refi, which is higher than what the new required monthly payment will be, my loan will be paid off sooner than 12 years because my interest rate is lower and more of my payment will go toward principal. When you have a 15-year loan, it doesn’t have to be 15 years. You can make it a 12-year loan, a 10-year loan or any shorter length you want by paying more than the required monthly payment.

  6. Brad says


    Does a rate with zero points usually mean that the lender pays ALL closing costs, or just the origination fee?

  7. Harry Sit says

    Brad – Zero point does *not* mean that the lender will pay ALL closing cost. There still can be various fees charged by both the lender and third parties.

  8. Brad says

    tfb – so did you get all closing costs covered in your case? Was the $3000 you referred to in your post all of various lender and third party fees, or just the origination? Thanks for your prompt response!

  9. Anonymous says

    Hi TBF,

    Answering your question, as long as you are not falling for “bait and switch”, your strategy is fine, assuming you are not planning on keeping your property for more than 5 years. Beware, there are a lot of schemers out there, all they have is a 1/4 point spread per hundred to work with and no points no closing costs is more enticing to them.

    Another point – going from 30 to 15 – you are increasing your P+I, should you lose a job, this may be a problem, but that’s kind of an obvious consideration

  10. Scott says

    The no cost refinance is by far better in your circumstance (if you plan on refinancing to a lower mortgage rate in the future). Long term, going for the lowest rate would save the most money. The problem, is nowaday, most homeowners don’t stay in their homes or their loan for the long term, so the low or no cost option would work better for most, in terms of savings.

  11. ROBB says

    hi, i am searching for something similar. i refie’d 3 times. i had a high fixed rate, 8.95% (the 80’s, yuk). and i got , what the bank called a “penny loan”. where all i paid was a penny. i was skeptical, but when all was said and done, i paid nothing. the broker paid the penny for me. this was offered for 5 or 6 years, with “citizens bank” here in MA. each time the rate went down, i took the penny loan. i cut my 20 year loan, down to 10 years, paid for 4 years, then refied, back to 10 years, with a much lower payment, and i rolled all my ccard debt in there as well. i am looking to find another bank with a “penny loan”. as there are no costs out of pocket , at all. robb.

  12. Harry Sit says

    xiangrong – I don’t understand what you meant to say. Did you refinance a $127,500 loan to 30-year fixed with no closing cost? What’s the rate?

  13. KSULL says

    EVERYONE calculates the pay back period on a no cost mortgage incorrectly. If you pay points and/or closing costs on MORTGAGE A…to compare apples to apples on the no cost MORTGAGE B….take the total amount from Mortgage A and deduct that amount from the amount financed in MORTAGE B. Now look at the 2 amortization tables…..It will most likely be 11-18 yrs payback before you recoup your costs and fees OR the total balance of your loan amount is equal…..not the 3-5 yrs as incorrectly advertised by the so called financial whizzes…..


  14. Bengal says

    What is this built-in option in my mortgage that you speak of? did you misspell “put”?

    “Every time the interest rate drops, I exercise the built-in put option on the mortgage and do a “no cost” refi.”

  15. Harry Sit says

    Bengal – The built-in option is the choice to prepay the principal balance in full without penalty. When interest rate goes down, the bank, as the owner of your mortgage, is deprived the enjoyment of receiving an above-market rate when you refinance and prepay. If the rate goes up, they are stuck with the below-market rate.

    Options come in a two flavors: an option to buy something at a predetermined price is a “call option”; an option to sell something at a predetermined price is a “put option.”

  16. Bengal says

    Thank you TFB for your reply, I’m a young adult who’s helping my monolingual mom look into this refinancing bit. I don’t know anything about the house that she bought last year because it was all done by the real estate agent who doesn’t bother with translations or explanations and i was away at college. I’m sad to say that it is the case with most immigrant first-time homeowners such as our family – clueless. So the story is that whatever that agent did, she did it slyly enough so that my mom looks like she has a really profitable job, which she doesn’t, in order to get us a loan. And now, a year later, knowing that interest rates are at its lowest, we are afraid to talk about refinancing because we think that there’s no way around it since we are not able to duplicate what that agent did nor do we want to attempt it since most of the employment verification was probably exaggerated in the first place. So my final question is… is there any way to refinance without them having to verify my mom’s employment/income again? couldn’t they just base it on her current mortgage? or would our application still be considered even though my mom’s income bracket is the lowest of the low?

  17. Harry Sit says

    Bengal – Sorry I know of no refi option that doesn’t require employment or income verification. I have not kept up with the loan modification process, which is different from a refinance.

  18. BKH says

    I refinanced in Aug, but rates are already 0.375% lower. Is there any reason the mortgage lender I used would restrict the length of time between refinancing? For example, does the mortgage lender have to refund the fees paid to them by the bank who purchased the loan if the mortgage is refinanced within a certain time period? If I were to find another mortgage lender, would they have problems finding a bank willing to purchase the loan if my current mortgage is only a few months old?

  19. Harry Sit says

    @BKH – Yes to the first question. A common “claw back” period is four payments. If you refinance before you make four payments the previous originator get its fees clawed back by the investor. No to the second question. If you find a different originator, they don’t care about the loss of the previous lender.

  20. LS says

    Thanks for your insightful posts.

    I was wondering how you were able to avoid paying your state’s mortgage tax when refinancing? When I refinanced, I was able to avoid paying my state’s mortgage tax because I refinanced through the same lender. Was it possible your state’s mortgage tax was covered in the closing costs by your lender or did your prior lender waive this cost for you? (which doesn’t seem to usually happen) Maybe your state doesn’t have a mortgage tax?

    I did see rates that were slightly lower from other lender’s, but these lenders were unwilling to do the necessary paperwork to get my state’s mortgage tax waived.

  21. Harry Sit says

    @LS – My state doesn’t have a mortgage tax for refinances. There’s a transfer tax on sales/purchases. Do you know which states have a mortgage tax?

  22. LS says


    I believe this is called a mortgage recording tax.

    From searching online, it looks like the following states. I know in New York State the rate varies by County as well.

    Current states already charging it include Alabama, Florida, Georgia, Hawaii, Kansas, Maryland, Minnesota, New York, Oklahoma, Tennessee, and Virginia.

    I was only able to avoid this fee by using the same lender since they most have some loophole to avoid having to record this again. This was annoying because at 1.05% (my State/County’s mortgage recording tax) this was too high an upfront cost for me to off-set with other lender’s lower mortgage rates at the time.

  23. Denise Lowry says

    I am in the process of refinancing my mortgage with the bank that currently holds the mortgage. The mortgage was just sold recently to the bank I am do the refi with. They are telling me the only way to avoid the transfer tax is to hire an attorney to do the CEMA paperwork. Why won’t they do it for me as I’m already paying and the reason why I went to them in the first place is because I was told I would save on some items do a refi with the same bank. Can you give me any information. I live in Westchester County, NY and the person I’m dealing with from Capital is in Texas.

  24. LES says

    @Denise – The company you are refinancing with now should have contacted a 3rd party to handle your CEMA paperwork for you. I suggest you ask them to put you in touch with one or reach out to one yourself.

  25. stephen says

    I am Stuck with Dilemma

    I had a 5 30 percent on a 30 yr fixed morgage around 2007 in MA. The rates were dropping so I decided to do a 15 yr paying points and closing to a 4.265 rate . There was a big saving.s
    which was a fabulous rate at that time. However, I am smack in the middle of a 15 year mortgage with 2 -3 years to go until there is only 10 years to go. I am not moving in the next 15 yrs.. The balance is $150,00.00 left at the 4.265. Do you you think even I could find a 10yr no points no closing cost loan on a 10 year without adding any cash to the loan would be best.or just making Extra (Principal only payments) when I I have extra bucks to take care of gettng rid of the loan faster? What would your thoughts be on this.? I am try trying to save money, but I think if I took the at the 10 yr fixed loan without no points or very little closing costs., I would be saving money as part of the mortgage is 20% is writen off on my home for my home business which is a consideration.such as taxes interest ect.? I think in the long run I would increase my payments and be locked in with the mortgage company and If I could not pay, that would have been a dumb move for small savings. This appears too complicated for me and beyond my pay grade.
    I would greatly apppeciate any comments on such a complexed issue.

    Thanking you in advance


  26. Harry says

    Stephen – If you are concerned about the increase in required monthly payment in a 10-year mortgage, you can also do a no cost refinance to a 15-year mortgage. Keep paying what you are paying now and make extra payments when you have extra money.

  27. Roy Hubbard says

    Each time you re-fi a mortgage you logically extend the life of the mortgage. I.E. If you have a twenty year mortgage that is going to pay out in fifteen years and you do a re-fi, even at a lower rate, you have to consider the cost of extending the payment period for an additional five years.
    I would think you reason for doing a re-fi has to be a lot more than just dropping your interest rate a quarter of a percent.

  28. Nick Kitchner says

    Hi TFB,

    I know this is an old thread I am digging up from my bookmarks so hopefully you still monitor for comments here.

    We recently sold our old house and moved into a new (slightly more expensive) house. I am 39 yrs old and we went with a 30 yr fixed mortgage at 4% rate just because my wife’s a stay-at-home mom and we wanted a safety net of a lower payment. However in the year since then….we have gotten some spare cash which right now just sits in an ally money market account (making ~1.2%)

    Is it worthwhile to apply that money to refinancing down to a 15 yr term and essentially keeping the same monthly payment? We’d be cutting our loan amount in half almost and term in half too (30 ->15 yrs).

    I considered other things like investing that money in the stock market/gold but I am not sure if I can do better than the 4% that I am currently paying on my loan (especially since the stock market is at all time highs nowadays).

    What’s your thought on this? Is there some type of guidance etc. that can be of assistance here? Is there anything better that I can do with that cash?

    • Harry Sit says

      I’m a fan of the 15-year mortgage. See Borrow 30-Year and Invest The Difference and Payment Flexibility Insurance. The higher payment not only earns the interest you otherwise are charged, it also brings down the rate on the entire loan. That said, if you are not maxing out all tax advantaged accounts yet, do so before you consider partial prepayment. You should also get more comfortable with investing at all-time highs. The stock market is supposed to go up and make all-time highs. Just because it’s at an all-time high doesn’t mean it’s a bad time to invest.

      If I were in this same situation and my cash flow can afford the payment on a 15-year loan, I would refinance to 15-year, buy some CDs with part of the spare cash if I need a larger cushion, and invest the rest.

  29. Emi says

    I came across this thread on “Refinancing with no closing cost” and bookmarked it. Hope you are still monitoring this. I’m very confused which option is best to take to refinance, I have been on a 30 yrs mortgage at 4.875 interest rate. I’m on this mortgage for the last 10 yrs and now as the interest rates are dropped, I’m thinking of refinancing. I really need to know what is the best option out of these 4. The bank told that:
    I can refinance at 4.375 for 30 year term at no closing cost
    or 4.25 for 30 year term at a closing cost of 4,000
    or 4.25 interest for 20 year term at no closing cost
    or 20 year term at 3.75 interest rate at a closing cost of 3,500.
    Monthly payments for 20 year are little tight with less breathing room. If that is the best option out of all these , I will try to manage.
    Can you advice which is the best option to take. Thank you.

    • Jefferson says

      The ethos of this article is to take the zero-cost loan, because you “[remove] the biggest uncertainty for any refinancing decision making — ‘Is it worth the closing cost?'” I’d take the 30-year zero-cost loan to leave flexibility for you, esp. at just 0.125% difference in rates. When I did a 30- to 15-year, it was 4.75% vs 3.25%, so I bit the bullet on flexibility to get the huge 1.5% rate difference.

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