No-Closing-Cost Mortgage: You Pay One Way or Another
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With closing costs ranging from 2% to 6% of the loan amount when you're buying a home, a "no-closing-cost" mortgage may sound like the ultimate money saver.
But the closing costs don't vanish. Instead of paying a lump sum at the closing table, you pay over time.
A no-closing-cost mortgage might be a sensible choice in some cases but an expensive move in others. Here's how to figure out whether a no-closing-cost mortgage is right in your situation.
How a no-closing-cost mortgage works
Closing costs are the expenses and fees for services required to finalize a home purchase. When buying a home with a mortgage, they include a lender's origination charge and fees for the appraisal, title insurance, government recording and other services.
There are two ways a no-closing-cost mortgage is structured:
The costs are added to your loan: You finance the costs as part of your mortgage and pay for them, with interest, over the full loan term, such as 15 or 30 years.
The costs are covered through a higher interest rate: In exchange for covering the costs, the lender will charge a higher interest rate on the mortgage.
Either way, you'll pay for the closing costs through a higher monthly mortgage payment.
Is a no-closing-cost mortgage right for you?
A no-closing-cost mortgage might be worth it if it gets you over the last hurdle to buying your first home. Just make sure you understand how those costs are covered, how financing them or paying a higher interest rate will affect your monthly mortgage payment and how paying the costs over time will add up.
Compare the total costs of a no-closing-cost mortgage with a traditional home loan. The extra monthly expense may not be an issue if you plan to sell the house or refinance the mortgage in three to five years. But over a long period, that extra bit you owe each month will add up to more than the closing costs, had you paid them upfront.
How to reduce closing costs
Before you pull the trigger on a no-closing-cost loan, consider options to lower your closing costs:
Ask the seller to pay some of your closing costs. Sellers are more likely to agree to pay some of the buyer's closing costs when there are more homes for sale than there are buyers or when the property has languished on the market for a long time. Work with your real estate agent to understand the local market and what you may be able to negotiate with a seller.
Explore first-time home buyer programs. Many state housing finance agencies and some local governments offer first-time home buyer programs that include grants and forgivable loans to cover closing costs.
Shop around for services: You may save money by comparison shopping for some of the services covered by closing costs, such as title insurance. Your Loan Estimate will list all the closing costs and identify the services you can shop for.
A lender must provide a Loan Estimate within three business days of receiving your application.
