According to ClosingCorp, the average closing cost on a mortgage transaction is $6,905. Closing costs usually vary from 2-5% of the home’s price and are a mandatory payment for homebuyers.
A no-closing-cost mortgage means you don’t have to pay closing costs immediately. The lender will bear all the closing costs and charge a higher interest rate to cover these costs.
Furthermore, the lender can add the amount to your mortgage, and you can pay it off along with your monthly installments.
No-Closing-Cost Home Loans
- Homebuyers can get a no-closing-cost mortgage for any loan program, depending on the mortgage lender’s policy.
- As a buyer, you will end up paying thousands of dollars more if you roll the closing costs into the mortgage. This is mainly due to higher interest rates.
- You can reach your break-even point faster with a no-closing-cost mortgage and refinance your loan.
What Are the Closing Costs of a Mortgage?
Here is a list of the costs you are expected to pay when closing on a mortgage:
- Mortgage origination fee
- Loan application fee
- Appraisal fee
- Home inspection fee
- Credit report fee
- Processing fee
- Underwriting fee
- Document preparation fee
- Title search and insurance fee
- Municipality deed fee
- Settlement fee
- Recording fee
- Homeowner’s Insurance
- Attorney’s fee
- HOA fee
- Property taxes
Both home sellers and buyers pay closing costs. However, the seller’s closing costs are higher than the buyer’s. Also, you can negotiate with the seller to share some of your closing costs.
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How Does a No-Closing-Cost Mortgage Work?
There are two ways in which no-closing-costs on a mortgage work:
- Rolling the costs into the mortgage: You can request the lender to add the closing costs to the loan amount. This will increase your loan balance.
- The lender covers the closing cost: Another way to avoid these costs is to let the lender pay them. You can save initially, but you have to make higher monthly payments.
Pros and Cons of No-Closing-Cost Mortgage
Here are some upsides and downsides of a no-closing-cost mortgage:
Pros
- Save Money Upfront: You save on the upfront costs by choosing a no-closing cost mortgage.
- Afford a Higher Down Payment: By saving on the closing costs, you can make a bigger downpayment.
- Cover Other Costs: As a new homebuyer, you will need extra finances to cover the moving-in and renovation costs.
Cons
- Bigger Loan Amount: You may have to pay a higher loan amount in the long run if closing costs are added to the mortgage.
- Higher Interest: You will have to bear higher interest if the closing costs are not rolled into the mortgage. This will also increase your monthly payments.
- Less Equity: Your initial ownership stake is lower because your mortgage amount is larger. It takes longer to own the complete equity of your home.
How to Get a No-Closing-Cost Mortgage?
Not many mortgage lenders offer no-closing-cost mortgages because they have to bear those costs upfront. You will need to research and shortlist the lenders who offer this option.
Banks and government mortgage programs usually cover some or all of the closing costs. Apply for a loan after comparing options and loan terms. A real estate professional can help you with the application and approval process.
Alternatives for a No-Closing-Cost Mortgage
Here are some alternatives to a no-closing-cost mortgage.
- Negotiate with your mortgage lender: The lender can waive off some of your closing costs, like the mortgage origination and application fees. You can talk to the lender and request a reduction or removal of these fees.
- Ask the seller to share the closing costs: You can add this condition to your agreement. Home sellers can spend up to 6% of the sale price to cover closing costs. These seller concessions can reduce your burden.
- Select a homebuyer program: Take advantage of the grants that are given to first-time home buyers by the government. You can get an interest-free loan equal to the closing cost if you meet their requirements. This is a good option to avoid upfront payments.
- Search for lenders offering no-fee loans: Some lenders attract home buyers with no-fee loans. These are promotional offers that can waive lender fees. However, you still have to pay the other closing costs, and the lender may recover the discount by increasing the interest rate.
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Is No-Closing-Cost Worth It?
A no-closing-cost mortgage allows you to avoid the upfront payment of closing costs. However, this comes at a greater cost, as you end up paying more in the long run.
Opt for a no-closing-cost mortgage for refinance purposes. Other than that, choosing an alternative to reduce closing costs is a better idea than going for a no-closing-cost mortgage.
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Frequently Asked Questions
Who offers no-closing-cost mortgage loans?
Banks, private mortgage lenders, and government-sponsored lenders may offer a no-closing-cost mortgage. The options are lesser compared to conventional loans so check carefully before selecting a program.
Can I roll closing costs into my conventional mortgage?
Yes, you can ask the mortgage lender to roll the closing costs into the conventional mortgage. However, whether the lender approves your request or not depends on their policy.
What if I can't afford closing costs?
You can opt for a no-closing-cost mortgage, or you can try some alternatives. Also, you can negotiate with the lender to waive some of the costs or with the seller to cover them.
How are mortgage lenders able to offer no-closing-cost mortgages?
Mortgage lenders offer no-closing-cost mortgage because they recover the cost in the long-run by charging a higher interest rate.
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