In addition to the deposit, your mortgage closing costs – usually payable on the date the home sale is finalized – will likely be the largest expense in the home buying process.
A popular way for home buyers to avoid paying thousands of dollars upfront at closing is to take out no-closing-cost mortgages. These arrangements, offered by mortgage lendershelp borrowers avoid this scenario, but they almost always end up costing more money in the long run than paying closing costs up front.
However, no-closing-cost mortgages may be worth considering in certain circumstances. Our guide will help you better understand what they are, how they work and their advantages and disadvantages.
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What is a no closing cost mortgage?
A no-closing-cost mortgage is an agreement with your mortgage lender that you do not have to pay your closing costs at the time of closing. (Lenders sometimes offer this to mortgage refinancingalso.) But the name is a misnomer because you will ultimately have to pay these closing costs one way or another, but not up front and all at once.
Still, a no-closing-cost mortgage can help you manage the various costs associated with closing on a home, which can cost thousands or even tens of thousands of dollars depending on your area.
Typical Mortgage Closing Costs
Mortgage closing costs are an assortment of expenses for various entities, including your local government, mortgage lender, insurance companies, real estate agents and/or attorneys, and others.
Here is a quick sample of some of the closing costs you may have to pay:
- Application fees, plus processing, underwriting or arrangement fees for your mortgage loan
- Fees to pull your credit reports and check your credit scores
- Prepaid interest covering the period between your closing date and the first mortgage payment
- Insurance premiums and administrative fees related to title insurance and home insurance
- Property taxes and recording fees for local government
- Home appraisal fees and other costs related to pest inspection or flood determination
- Other expenses include prepaid filing fees, attorney fees, and title search fees.
In total, these closing costs tend to be between 2% and 5% of the price of the home. (In some cases, this amount may even exceed your down payment.)
According to real estate data company CoreLogic, average closing costs were just under $7,000 nationwide in 2021. However, they can vary widely from $30,000 in Washington, D.C. to as little as 2 $000 in Missouri.
Mortgage lenders are legally required to estimate your closing costs (among other mortgage-related details). This appears first on a Loan Estimate form as you research lenders, and then again, in more detail, in what is called a Closing Disclosure Form which must be provided to you at least three days before the settlement date.
How No Closing Cost Mortgages Work
As mentioned above, you will still have to pay closing costs with a no closing cost loan. The main difference with this type of mortgage is When.
With typical mortgages, you pay closing costs up front on the settlement date listed on your closing disclosure form – alongside but separate from your down payment.
With a no-closing-cost mortgage, you won’t need as much money upfront. Instead, your lender essentially rolls the various closing costs into the term of your loan in one of two ways: It either waives your closing costs while increasing the interest rate on your mortgage – usually around 0 .5% – or it adds closing costs to the total loan. Rising.
In either case, the monthly payment will likely be higher and you’ll end up paying a lot more over the life of the loan.
Benefits of No Closing Cost Mortgages
- Reduce your upfront costs of buying a home: One of the biggest financial barriers to homeownership is high out-of-pocket expenses. Saving for a down payment is difficult enough for many home buyers: additional closing costs of up to 5% make homes even more out of reach. A no-closing-cost mortgage removes at least one of these major obstacles.
- Improve cash available for other expenses: If you exhaust all of your savings to get the “cash to close” amount (i.e. closing costs plus down payment) on your new home, you risk becoming “cash poor”, meaning you may have decent equity in your home, but not have enough money left over to cover emergency expenses or repairs. Although they cost more in the long run, a no-closing-cost mortgage can allow you to keep some of your savings for such expenses.
- Potentially allowing a larger down payment: With the money freed up through a no-closing-cost mortgage, you can choose to put it toward a larger down payment on the home, potentially eliminating the need for private financing. mortgage insurance (PMI) and increase your home equity.
Disadvantages of No Closing Cost Mortgages
- Pay over a longer term via a higher interest rate or capital: A no-closing-cost mortgage may seem like a bargain now, but consider how the costs add up in the long run. Current Mortgage Rates have hovered above 6.5% while median home prices are around $430,000. Let’s say you put down 20% and your mortgage payments (excluding taxes, fees, etc.) are $2,177. According to Money’s mortgage calculator. (As a reminder, average initial closing costs are around $7,000.)
- Perhaps less equity in your home: If your closing costs are rolled into your mortgage and your loan balance is therefore larger, you’ll start with less equity in your home and distort your loan-to-value ratio. (And if you don’t have 20% equity in your home to begin with, your lender will likely require you to purchase private mortgage insurance.)
- Fewer options for mortgage lenders: Not all lenders offer no-closing-cost mortgage options. So if you go 100% for this type of mortgage, you’ll have fewer lenders to compare and probably a little less room to negotiate other fees. (Some lenders may offer low-cost mortgages instead. Same idea, but closing costs are capped at, say, $500.)
No Closing Cost Mortgage FAQs
Who Offers No Closing Cost Mortgages?
Only some mortgage lenders offer home loans with no closing costs. Bank of America, ThirdFederal Bank and PNC Bank, for example, all have no-closing-cost mortgage programs, as do several credit unions.
Are closing costs included in mortgages?
Not automatically. Most lenders expect closing costs to be due on the settlement date, along with your down payment. No-closing-cost mortgages, which can roll all closing costs into the loan, are the exception.
What happens if I can’t pay closing costs?
If you can’t afford the closing costs, you have several options. A no-closing-cost mortgage is just one of them. Alternatively, you can find similar low closing cost mortgages that cap closing costs or try to negotiate with the seller to cover all or part of your closing costs. If you qualify, you can also apply for homeownership assistance programs in your area that help first-time home buyers cover down payments and/or closing costs, typically for single-family homes .
Summary of Money’s Guide to No Closing Cost Mortgages
- No-closing-cost mortgages can help cash-strapped buyers afford a home by reducing the amount of money required upfront to purchase a home.
- The name is misleading because you still pay closing costs, but in a different way: either in the form of a higher mortgage interest rate or as closing costs simply added to your loan balance .
- When paid upfront, closing costs represent about 2 to 5 percent of the home’s purchase price, with the national average being about $7,000. Over the life of a 30-year loan with the no closing cost option, you could end up paying a lot more than that, over $40,000 over the life of the loan, assuming you don’t refinance or do not sell the house before then. .
- No-closing-cost mortgages aren’t the only way to avoid high closing costs. You have other options, such as closing cost assistance programs and negotiating with the seller to cover part or all of your closing costs.
