When the lender covers all one-time closing costs associated with the refinance transaction.
A no-cost refinance is a refinance in which the lender covers all non-recurring (one-time) closing costs associated with the transaction. To do so, the lender offers a slightly higher interest rate in exchange for a lender credit large enough to cover the loan fees, title fees, recording fees, etc. The borrower is still responsible for coming in with those costs that would have been incurred regardless of the refinance, such as the upfront costs for a new impound account and pre-paid interest.
When rates drop, a no-cost refinance is a great option to take advantage of lower interest rates without needing to come in with significant funds out of pocket.