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Buying a new home is an exciting time, but it also comes with many upfront costs that can be a financial burden. One way to reduce these initial expenses is through a no closing costs mortgage loan. In this comprehensive guide, we’ll explain everything you need to know about these types of mortgages, including how they work, their pros and cons, and whether it’s the right option for your home purchase.
What Are No Closing Costs Mortgage Loans?
With a traditional mortgage, the borrower has to pay various fees at closing called closing costs. These can include charges for appraisals, title insurance, origination fees, and more. The total usually ranges from 2-5% of the loan amount.
A no closing costs mortgage helps borrowers avoid these upfront closing fees by having the lender pay for some or all of these costs. The lender recovers the money by charging a higher interest rate over the life of the loan or by rolling the fees into the total loan amount.
Essentially, the borrower trades lower upfront costs for potentially higher long-term costs. It allows you to spread out closing costs over time rather than paying lump sum at closing
How Do No Closing Costs Mortgages Work?
There are a couple ways lenders can structure no closing costs loans
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Higher Interest Rate – The lender covers closing costs but charges a higher rate, usually 0.25-0.50% higher, over the life of the loan to recoup the costs.
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Financed Closing Costs – The lender rolls closing costs into the total loan amount, so you finance them and repay over time through your monthly payments. This increases loan amount and interest paid.
The specific details can vary by lender. Some key things to look out for are prepayment penalties, which charge a fee if you refinance or pay off the loan early. Also, ask if there’s a minimum time you need to keep the loan until you can refinance without penalty.
The Pros of No Closing Costs Mortgages
Here are some potential benefits of no closing costs loans:
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Less Cash Needed at Closing – The main appeal is needing less cash upfront, which helps borrowers who are cash-strapped.
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Smaller Down Payment – You may be able to make a smaller down payment since you aren’t paying closing costs out of pocket.
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Earlier Break-Even Point – You reach the “break-even” point between upfront and monthly costs quicker without large closing fees.
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Potentially Lower Rate – In some cases, the higher rate may actually be lower than what you’d get on a traditional loan based on your credit and financial profile.
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Easier Approval – Lenders may offer a better rate and term for borrowers who don’t quite qualify for the best traditional loans.
The Cons of No Closing Costs Mortgages
There are also some potential drawbacks to weigh:
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Higher Long-Term Costs – The higher interest rate means you pay more over the full loan term, especially on long-term loans.
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Larger Loan Amount – Financed closing costs mean you borrow more and have higher monthly payments.
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Prepayment Penalties – Some lenders charge you if you refinance or pay off the loan too early. Make sure to ask about any prepayment terms.
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Ineligibility to Refinance – You may need to keep the loan for a minimum period before being allowed to refinance without penalty.
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Extended Payoff Time – With a larger loan amount, it takes longer to pay off the mortgage.
Should I Get a No Closing Costs Mortgage Loan?
Whether this type of loan makes sense depends on your personal situation:
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Good for Shorter-Term Borrowers – The higher costs are spread out over a shorter period, so you may come out ahead if you sell in 5-7 years.
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Good for Cash-Strapped Borrowers – If you don’t have funds saved for closing costs, this reduces your upfront payment.
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Bad for Long-Term Borrowers – You’ll likely pay thousands more over the life of a 30-year mortgage because of the higher interest rate.
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Bad if Planning Early Refinance – Prepayment penalties can make it expensive to refinance within the first few years.
You’ll want to estimate both the upfront costs you pay now and extra amount you’ll pay over the full loan term to make the right decision. Consider talking to a financial advisor if you need help weighing the options.
How to Find No Closing Costs Mortgage Lenders
Many national lenders and banks offer no closing costs mortgages, but availability and terms vary:
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Banks – Large banks like Wells Fargo, Chase, and Bank of America may offer these loans, but approval is based on your financial profile.
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Online Lenders – Several online lenders like Quicken Loans and LoanDepot offer no closing costs mortgages to qualified borrowers.
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Mortgage Brokers – Brokers can shop multiple lenders for you, helping find no closing costs loans that match your needs.
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Government Programs – Government-backed loans like FHA and VA mortgages sometimes offer no closing costs options based on the lender.
I recommend getting quotes from multiple lenders so you can compare interest rates and terms side-by-side. Pay attention to factors like origination fees, prepayment penalties, and any eligibility requirements too.
Other Ways to Get a Low Closing Costs Mortgage
If you decide no closing costs isn’t right for you, here are a few other ways to reduce your upfront costs:
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Shop Around – Compare quotes from multiple lenders, as costs can vary widely between them.
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Negotiate – Ask your lender to reduce or waive certain fees. They want your business, so sometimes they’ll negotiate.
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Split with Seller – Ask the seller to cover a portion of the closing costs by reducing purchase price.
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Use Down Payment – If you have excess funds, use some for closing costs instead of fully maximizing down payment.
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Use Gift Funds – If getting a gift from family, see if they will provide funds to cover closing costs.
The Bottom Line
While no closing costs mortgage loans reduce your upfront expenses, they also raise your long-term costs. Carefully compare your options using mortgage calculators and cost of homeownership tools. For most long-term buyers, paying closing costs upfront saves substantially compared to a higher rate over 30 years. But for short-term buyers or those without sufficient cash, no closing costs loans can be a viable option. Just be sure to shop around and negotiate with lenders to maximize savings.
What is a no-closing-cost mortgage?
The name “no-closing-cost mortgage” is a bit of a misnomer. Closing costs don’t magically disappear. It’s just that you’re not paying them all at once, in cash, on closing day.
“You’ll still be responsible for these fees,” says Chuck Meier, senior vice president and mortgage sales director for St. Paul, Minnesota-headquartered Sunrise Banks. “The only difference is that, under a no-closing-cost mortgage, your lender will either add those fees onto your principal balance or charge you a higher interest rate on the loan to cover those closing costs.” Mortgage How much are mortgage closing costs?
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- Many lenders offer no-closing-cost mortgages, meaning you dont need to pay the closing costs upfront when you buy a new home.
- Instead, closing costs are rolled into the loan balance or compensated for in the form of a higher interest rate.
- On the plus side, no-closing cost mortgages mean less immediate outlay. On the downside, these loans tend to cost more over their lifetimes.
Every home loan and refinance comes with closing costs, which can be a hurdle if you’re short on the cash needed to seal the deal. That’s where a no-closing-cost mortgage comes in. Instead of paying the closing costs in a lump sum when you buy a home, the various fees are rolled into the loan balance or padded into your mortgage interest rate.
Sound like a good deal? It can be, but only after you weigh the pros and cons. Here’s how no-closing-cost mortgages work and how to decide if one is right for you.
The pros and cons of no-closing cost mortgages
FAQ
Is a no closing-cost mortgage a good idea?
Can you negotiate no closing costs?
Why are FHA closing costs so high?
What is a no cost loan?