Buying a home is expensive. You'll need to consider not only what you can afford to pay every month, but what you can afford to pay at closing time. No closing cost mortgages can help you reduce the initial costs of closing on a home.
If you’re tempted to use a no closing cost mortgage, understand how they work, what the trade-offs are, and when they make the most sense for you.
Higher Rates, Lower Fees
When you use a no closing cost mortgage, you still pay the fees. Instead of paying these fees upfront in a lump sum, they are added to your mortgage in the form of a slightly higher interest rate.
The interest rate is a key “ingredient” when calculating your monthly payment. Compare the rates available for loans with and without closing costs to find a general idea of the differences.
For example, on a $250,000 loan, the monthly principal and interest payment would be $1,342.05 if you borrow at 5%. A no closing cost mortgage may increase your rate to 5.5%, raising your monthly payment to $1,419.47.
Lower Rates, Higher Fees
In the previous example, the original monthly payment was $1,342.05. A traditional mortgage with closing costs would keep this payment amount, with closing costs due at closing.
No Closing Cost Mortgage: Considerations
Paying extra each month is not necessarily bad. It can be the right choice in some cases. If you’re fairly certain that you’ll sell the house or refinance the loan within a few years, you might consider a no closing cost mortgage. You’ll only pay the higher monthly payment for just a few years before selling the home.
Think twice about taking the higher rate — no closing costs — when:
- You plan on keeping the home for many years.
- You can afford to pay closing costs and "buy down the rate" (purchasing points from your lender lower the rate on your mortgage, effectively lowering your monthly payments.)
Choosing a No Closing Cost Mortgage
If you’re interested in no closing cost loans, consider all the factors and spend at least a little time running the numbers.
You can often get a variety of quotes from the same broker, some of them with closing costs and others with different levels of closing costs. With all of the options in front of you, you’ll see that you can find a level of cost that’s acceptable to you.
Do some comparison shopping as well. Ask several mortgage brokers as well as your bank or credit union for quotes. Check with an online lender. You’ll find that they structure closing costs differently and can offer different rates. A careful analysis of your financial situation will reveal whether you can make a no closing cost mortgage work for you.