When you opt for a no-closing-cost mortgage, your lender will cover the closing costs so that you can complete your dream home purchase. A no-closing-cost mortgage will help you save money upfront but can cost you more in the long run.
Let’s dive into the details
How much are Closing Costs for first-time home buyers?
In any real estate transaction, both the seller and the buyer pay closing costs. Seller closing costs usually add up to 8%-10% of the sales price. On the other hand, buyer closing costs come up to 2%-6% of the purchase price.
We have listed a few below
- Application Fee: The application fee is an upfront fee lenders charge when you submit your loan application. It is a non-refundable charge. This means that you do not get this money back even if the loan application is rejected.
- Appraisal Fee: Lenders hire an appraiser to determine the fair market value of the property the buyer wants to purchase. Home buyers should include appraisal fees when calculating the total closing cost.
- Attorney Fee: Real estate attorneys draft and review the purchase agreement and transfer of title on behalf of the lender while also offering advice on negotiations. Buyers are responsible for the attorney fee.
- Closing Fee: A closing fee is paid to the escrow or settlement agent for the disbursement of funds between the seller and you.
- Homeowner’s Insurance: Lenders generally require you to purchase homeowner insurance before they finance the loan as it protects their investment. Homeowner’s insurance premiums are usually a part of the escrow funds.
What Does ‘No Closing Cost’ Mortgage Mean?
‘No closing cost’ mortgage means that the borrower does not pay the closing costs at the time of borrowing the loan.
This does not mean that he doesn’t pay at all. Actually, the lender pays the closing on the borrower’s behalf initially and collects the same via his loan amount.
Advantages
- Lower upfront costs: Including the closing costs in the overall loan amount will let the borrower avoid the cost initially.
- Be cash ready: No Closing cost mortgage will let the borrower have some cash handy while shifting the house.
- Easier to qualify: The borrowers may find it easy to qualify as they don’t need to make any upfront payments.
Disadvantages
- Higher interest rates: The lenders may charge a higher interest rate that will leave the borrower to pay higher costs in the loan tenure.
- Limited options: Looking for a ‘no closing cost mortgage’ lender will leave the borrower with limited options and rigid terms.
- Higher monthly payments: ‘No closing cost mortgage’ results in higher monthly payments due to revised interest rate and increased loan balance.
How does ‘No Closing Cost Mortgages work’?
No closing cost mortgage allows the borrowers to pay their closing costs rolled up in the total mortgage amount.
For example, let’s say you have to pay $5,000 as a closing cost on a loan of $200,000. In this case, the lender would add this closing cost to the overall loan amount. So now your total mortgage loan would sum up to $205,000.
Also, the lender may charge a higher interest rate in order to compensate for the closing costs.
Can Closing Costs be included in the loan?
Yes, the closing cost can be included in the loan. The borrower may negotiate with the lender to do so. If the lender agrees to a ‘no closing cost mortgage’ then the lender may compensate it by charging higher interest.
The Bottom Line
‘No closing cost mortgage’ can be a good option for borrowers who cannot arrange the closing cost amount. By doing so, the borrower will have to pay his loan with a higher rate of interest. This mortgage concept has its own pros and cons.
We suggest you study your fund availability and the lender rules on ‘No Closing Cost Mortgage’ and then take the decision.
Frequently Asked Questions
Is there a way to avoid closing costs?
You can try some of these strategies to avoid closing costs like negotiating with the lender, including the closing cost in the mortgage.
Who are lenders that help with closing costs?
Some government-backed loan programs, such as FHA loans and VA loans, may offer assistance with closing costs. While some lenders have their own set of mortgage rules.
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