No-Closing-Cost Mortgage

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What You Should Know

  • A no-closing-cost mortgage allows the buyers to roll closing costs into mortgage payments instead of paying up front.
  • Lenders usually set a higher mortgage rate for no-closing-cost mortgages even if a borrower has an excellent credit score.
  • Not every lender offers a no-closing-cost mortgage, so it is important to ask different lenders to get one.

What Is a No-Closing-Cost Mortgage?

Family

A no-closing-cost mortgage is a type of mortgage where all closing costs associated with the house are not paid upfront but instead are rolled into the mortgage payments. Buying a property requires a substantial amount of capital. Apart from the required down payment on a mortgage, the buyer has to pay closing costs on the property that usually need to be paid upfront. These closing costs can range anywhere from 3% to 6% of the total purchase price. A borrower looking to refinance their mortgage can also take advantage of refinancing with no closing costs.

Pros And Cons of a No-Closing-Cost Mortgage
ProsCons
Fewer Upfront CostsHigher Mortgage Principal
More Money For Down PaymentHigher Mortgage Rate
Less Time Needed to Break EvenHigher Monthly Payments

A no-closing-cost mortgage allows the borrower to finance the closing costs instead of paying up front. In this case, the borrower does not have to pay closing costs when buying a property, but the closing costs are added to the principal of the mortgage. Since they are added to the principal of the mortgage, the borrower will have to pay off the closing costs plus interest over the lifetime of the mortgage. In addition to that, if the lender commits to cover the closing costs upfront, they are likely to increase the interest rate on the mortgage, which will increase the monthly mortgage payment amount even more.

Who Offers No-Closing-Cost Mortgage?
Capital Bank
Better
New American Funding
AmeriSave Mortgage

How Does No-Closing-Cost Mortgage Work?

A borrower may discuss the possibility of a no-closing-cost mortgage with their lender. If the lender agrees to provide the financing for the closing costs, then the lender will simply add the closing costs to the mortgage principal. In this case, the borrower does not have to pay the closing costs upfront, but they will have to pay off the original mortgage principal, closing costs, and any interest accrued during the lifetime of the mortgage. Most of the time, a lender will also set a higher mortgage rate for a no-closing-cost mortgage even if the borrower has an excellent credit score.

Mortgage Cost Comparison
ItemConventional MortgageNo-Closing-Cost Mortgage
Down Payment$90,000$90,000
Closing Costs$18,000$0
Mortgage Term15 Years15 Years
Mortgage Principal$360,000$378,000
Mortgage Rate2%2.5%
Monthly Payments$2,316.73$2,520.46
Total Costs$524,993.64$543,683.38

As an example, suppose a buyer wants to purchase a house for $450,000. They could purchase it with a regular 15-year mortgage with a 20% down payment, a 2% mortgage rate, and $18,000 in closing costs. In this case, the buyer has to pay $108,000 at the time of closing and commit to monthly payments of $2,316.73. The total amount paid over the life of the mortgage is $524,993.64. At the same time, the lender offers a no-closing-cost mortgage with the same terms and a mortgage rate of 2.5%. If the buyer chooses the no-closing-cost mortgage, then they have to pay only a 20% down payment upfront. The buyer has to pay $90,000 at the time of closing and commit to monthly payments of $2,520.46. The total amount paid over the lifetime of the mortgage is $543,683.38. In this example, the no-closing-cost mortgage will cost the buyer an extra $18,689.74. A borrower who is considering the options between the two mortgage types may calculate the mortgage amortization in both cases to see what fits their financial objectives the most.

No-Closing-Cost Mortgage Pros & Cons

Just as with any type of loan, a no-closing-cost mortgage comes with its unique advantages and disadvantages that must be considered before choosing this type of mortgage.

Pros:

  • Fewer Upfront Charges

    The main benefit of a no-closing-cost mortgage is that the buyer pays less at the time of closing. Buying a house requires a lot of capital. An average person may need to save up just to cover the down payment for the house. A no-closing-cost mortgage relieves the buyer from the burden of paying for closing costs at the time of closing.

  • Afford a Bigger Down Payment

    Since the buyer can save up some money in upfront charges, the buyer may use the saved money to contribute more to the down payment. In some cases, a buyer may even get a more expensive property since they can afford to contribute more than required. On the other hand, the buyer must remember that even though they can contribute a bigger down payment for a more expensive house, it does not mean that they can afford it.

  • Reaching Break-Even Point Earlier

    Contributing less at the closing of the deal means that the owner may reach the break-even point much earlier than if they had to spend extra money to pay the closing costs.

Cons:

  • Larger Mortgage Principal

    A borrower who chooses to go with a no-closing-cost mortgage still has to pay for closing costs. Instead of paying for them upfront, a lender adds the costs to the mortgage principal that are paid off over the mortgage life. This means that the buyer will have to pay larger monthly payments and more interest.

  • Higher Interest Rate

    A lender usually sets a higher mortgage rate for a no-closing-cost mortgage. The buyer will have to pay a higher interest rate on the whole mortgage principal, which may add up quite a bit over the life of a mortgage.

  • Higher Monthly Payments

    Because of the two reasons above, the monthly mortgage payments are expected to increase quite a bit. This means that the buyer will have less income to spend after monthly payments. A buyer has to ensure that they can sustain their lifestyle given their income after the mortgage payments.

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