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Closing costs are the expenses you’ll pay for getting a mortgage. They cover services that involve determining the home’s value, making sure the title is clear, and processing the loan.
Closing costs can amount to thousands of dollars, making them a potential barrier to anyone who wants a mortgage. To address this problem, lenders offer no-closing-cost mortgages that allow you to spread out the expense over time instead of paying it upfront.
Here’s what you need to know about no-closing-cost mortgages:
What are mortgage closing costs?
Closing costs typically total 2% to 5% of the loan amount, and they apply whether you’re buying or refinancing. For example, that’s $5,000 to $12,500 on a $250,000 mortgage — a sum that can be especially daunting if you’re a first-time homebuyer.
The range is broad because costs vary by location and provider. Nationwide, closing costs on an average home in 2019 were $5,749 including taxes, and $3,339 excluding taxes, according to a report by ClosingCorp.
Here are a few common closing costs. The example assumes a $250,000 loan.
|Processing and Underwriting||$1,000|
|Lender’s title insurance||$1,000|
Additional closing costs you might pay include:
- Borrower’s title insurance: Although it’s optional, many buyers choose to purchase the coverage as it can protect you from potential title problems in the future.
- Attorney fees: Some states require you to hire a real estate attorney to close on your home. Depending on the attorney, you’ll pay a flat fee or be charged by the hour.
- Transfer taxes: This is the tax you’ll pay to have the title of the property transferred to you. A majority of states charge a transfer tax.
- Upfront mortgage insurance or funding fees: You might have to pay these costs if you’re obtaining a government-backed mortgage, such as an FHA loan or USDA loan.
What is a no-closing-cost mortgage?
If you get a no-closing-cost mortgage, you won’t have to pay closing costs upfront. In exchange, the lender will either pay your closing costs and charge you a higher interest rate, or add the closing costs to your loan amount.
You can use Credible to see what mortgage rates you qualify for. Our process is fast, has no affect on your credit, and won’t subject you to unwanted contact from lenders.
Pros and cons of a no-closing-cost home loan
Here are the benefits and drawbacks you should be aware of if you’re considering a zero-closing-cost mortgage.
- It might be easier to become a homeowner or refinance. Homeowners are usually keen to have a comfortable sum in savings so they can afford repairs and keep paying the mortgage during a financial setback. Paying thousands out of pocket might make you less financially stable — and some people just don’t have the cash.
- Closing costs might be less expensive than they seem in the long run. If your closing costs are $10,000, your interest rate is 3%, and your loan term is 30 years, you’ll pay $5,178 in interest over 30 years. A 5% interest rate would increase the long-term interest cost to $9,326. However, if inflation is 2% per year, your effective interest rate is only 1%. That’s only $1,580 over the long run.
- You might pay more interest in the long run. By not paying closing costs upfront, you’ll spend more since you’ll either borrow more or pay a higher interest rate instead. To counteract this, you could always make extra principal payments later.
- You’ll have higher monthly payments. Financing $10,000 over 30 years at 3% interest costs an extra $42 per month. At 5%, it costs $54. But remember what we said about inflation.
Should you get a no-closing-cost home loan?
The type of borrower most likely to benefit from a zero-closing-cost home loan is one who cannot or would prefer not to pay the costs upfront.
You should consider a no-closing-cost mortgage if:
- You get a low interest rate
- You’re short on savings but can comfortably make a higher monthly payment
- You expect to move or refinance in a few years
You should avoid a no-closing-cost mortgage if:
- You get a higher interest rate
- You have the cash to comfortably pay closing costs upfront
- You expect to keep your mortgage until it’s paid off
Credible can help you compare mortgage rates from multiple lenders — you can see prequalified rates from our partner lenders in the table below in just a few minutes. It’s easy, and it won’t affect your credit score.