No-Closing-Costs Mortgages: When Does It Make Sense?

Written by Elijah BishopUpdated: 28th Dec 2021
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If you’re familiar with the typical mortgage process, you probably have an idea of how expensive closing costs can be. Mortgage closing costs are upfront fees you pay to close on your home purchase.

On average, these costs typically add up to 2% – 5% of the total loan amount. But who pays for these costs will depend on the loan type, your mortgage lender, and your negotiation skills.

So, what do you do to help with all these costs? A no-closing costs mortgage is one of the many options that can help you pay for these upfront fees. But is a no-closing-cost mortgage really what it sounds like? That’s precisely what this article will discuss.

What Is a No-Closing-Cost Mortgage?

A no-closing cost mortgage is more of a misnomer since it gives home buyers the wrong idea of getting out of paying for closing costs altogether. However, unlike traditional mortgages where you have to pay the closing costs out-of-pocket, you do not have to pay for the closing costs directly or out-of-pocket with a no-closing cost mortgage.

When you take out a no-closing costs mortgage, your lender pays for part or all of your closing costs.

You will have the costs padded into your interest rate or rolled into your mortgage loan in exchange.

Typically, it is common for lenders to cover the costs of your mortgage origination fees, home appraisal, title search, taxes, and mortgage insurance premiums (MIP) when you take out a no-closing cost mortgage.

How Do No-Closing-Cost Mortgages Work?

To be clear, a no-closing cost mortgage doesn’t mean you’ll never have to pay for closing costs. Your lender will make you pay for it in one way or the other. However, in this scenario, the lender will adopt one of the two strategies:

  • You finance the closing costs. In this case, the lender will add your closing costs to your total loan balance. Your monthly payments will be slightly higher, and you’ll be paying these closing costs, with interest, for the entire term of your loan — so, for example, over 15 or 30 years.
  • The lender will absorb the closing costs in exchange for a higher interest rate. Again, you’ll pay a bit more each month, and your total interest cost will be greater over the life of the loan.

Either of the two strategies will increase your monthly mortgage payment, which will cause your mortgage to be a bit more expensive than traditional mortgage loans.

It is common for online mortgage lenders to add a pre-payment penalty to prevent home buyers from refinancing before recouping their costs.

How Much Do Closing Costs Traditionally Cost?

Closing costs typically cost a total of 2% to 5% of the loan amount, and they apply whether you’re buying or refinancing. For example, that’s $5,000 to $12,500 on a $250,000 mortgage — a sum that can be incredibly daunting if you’re a first-time homebuyer.

According to mortgage lending rules, your lender is legally required to provide you with a closing disclosure that gives you an estimate of the closing costs at least three days before the closing day. Let’s take a look at what some closing costs include:

  • Home appraisal fees
  • Title insurance
  • Property taxes
  • Homeowners insurance
  • Mortgage origination fees
  • Application fees
  • Processing fees

While this list covers the various expenses to expect, it isn’t final. Depending on your mortgage situation, there may be several additional fees associated with your mortgage closing costs.

Can You Buy a House with No Closing-Costs?

Not at all. You must pay for your mortgage closing costs either directly or indirectly. Your decision will be whether to settle in cash on the closing day or have it rolled into your mortgage when refinancing. However, you can reduce the money you pay in closing costs by negotiating several of the fees included in the closing disclosure.

You may also qualify for adown payment and closing costs assistance if you are a first-time homebuyer.

Qualifying for a down payment or closing costs assistance program allows you to access free monetary support, which may only be paid when you refinance or move out of the home.

In addition, if you’re in the military, you may be able to take advantage of the VA loan programs, which do not require down payment and has a limit on allowing closing costs.

>> More: What Mortgage Closing Costs Are Negotiable?

What Are the Advantages of No-Closing Cost Mortgages?

Below are some of the advantages of taking out a no-closing cost mortgage:

  • If you’re buying your first home, a no-closing cost mortgage allows you to close on the home purchase without stretching your cash and finances.
  • Less payment upfront means you will reach your “breakeven” point earlier.
  • You may be able to afford a bigger down payment if you don’t need to pay the upfront closing costs.

What Are the Disadvantages of No-Closing Cost Mortgages?

Below are some of the drawbacks of taking out a no-closing cost mortgage:

  • It could be more expensive in the long term (especially if you’re looking to reside in your new home for a long time) due to the rolled-in mortgage origination fees or higher interest over the life of the loan.
  • There are higher monthly payments than a traditional mortgage loan, where you pay the closing costs upfront.
  • You might have a larger loan if your lender chooses to roll your closing costs into your mortgage. Remember that your lender can only roll in the closing costs into your mortgage if you are doing a mortgage refinancing.

Who Offers No-Closing-Cost Mortgages?

Many lenders offer no-closing-cost mortgages to borrowers. At closing, you’ll roll the associated costs into your mortgage. This will increase your interest rate and your monthly payments. To qualify for a no-closing-cost mortgage, you’ll need to have a good credit history, a great credit score, and a low debt-to-income ratio. Please shop around lenders to find out if they offer no-closing mortgages, the terms, and how they can help your mortgage situation.

>> More: Best Online Mortgage Lenders

How Can You Avoid Paying Closing Costs on a Mortgage?

Buying a new home, or refinancing an existing mortgage, will require you to pay closing costs. But instead of paying them directly, you could ask your lender to add some of them to your loan amount.

You could also get lender credits which amount to accepting a higher interest rate in exchange for help covering closing costs. Or you could ask the seller to help you pay for all or some closing costs, especially in a buyer-based market. Sellers aren’t obligated to help. Be sure to ask before signing the purchase offer. You can also take advantage of closing costs assistance or down payment assistance through a first-time homebuyer program in your state.

When Does a No-Closing-Cost Mortgage Make Financial Sense?

If you’re contemplating whether or not to take out a no-closing cost mortgage, you must find out if it is the best financial decision for you and your finances.

You should consider a no-closing-cost mortgage if:

  • You get a low-interest rate
  • You’re short on savings but can comfortably make a higher monthly payment
  • You expect to move out from the house or refinance your mortgage in a few years

You should avoid a no-closing-cost mortgage if:

  • You get a higher interest rate
  • You have the cash to pay closing costs upfront comfortably
  • You expect to keep your mortgage until it’s paid off

Bottom Line: No-Closing-Cost Mortgages

Depending on your situation, a no-closing cost mortgage may be the best choice for you. While rolling these costs in with your mortgage or settling for a higher interest rate will raise your monthly mortgage payments, but it’ll also free up some cash flow when you’re purchasing your home.

Before you make a final decision, do your homework. See if you can consider any other alternatives, like asking your seller to pay for part of the closing costs or applying for a closing costs assistance program.

Above all, you should consider shopping around lenders, so you’ll find the best mortgage terms, closing costs, and interest rates.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.