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?
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.
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? |
|---|
Closing Cost vs. No Closing Cost Mortgage
With a closing cost mortgage, the borrower pays the closing costs up front when buying a property. In contrast, in a no-closing cost mortgage, the borrower finances the closing costs through the mortgage payments. Closing cost mortgages have an upfront fee of 3%-6% of the loan amount. However, homebuyers will receive a lower interest rate.
| No-Closing Cost | Closing Cost | |
|---|---|---|
| When you pay closing costs | Included in mortgage payments | Up front at closing time |
| Mortgage interest rate | Higher | Lower |
Paying for the Closing Costs Upfront
When you get a mortgage, you will have to pay closing costs. This includes miscellaneous fees such as title insurance, property taxes, and more. However, you have the option of when to pay the closing costs.
If you pay the closing costs upfront, you will have to come up with the money at the closing time. This can be difficult for borrowers with little cash saved up. In addition, if you are using all of your savings to make a down payment on the property, you may not have enough left over to cover the closing costs.
If you cannot pay the closing costs upfront, you may have to ask the seller to cover them or roll them into your mortgage payments.
No-Closing-Cost Mortgage Rates
If you roll the closing costs into the mortgage, you will usually have higher mortgage rates. Lenders do this to make up for the fact that they are not being paid upfront. You will likely have to pay a higher interest rate if you choose a no-closing-cost mortgage over a closing-cost 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.
No Closing Cost Refinance
If you already have a mortgage, you can refinance closing costs into your mortgage. This is the same concept where the borrower pays no closing costs when they refinance their existing mortgage. Closing costs are paid by the lender and can include appraisal fees, loan origination fees, title insurance, and more.
No-Closing-Cost Mortgage Example
| Mortgage Cost Comparison | ||
|---|---|---|
| Item | Conventional Mortgage | No-Closing-Cost Mortgage |
| Down Payment | $90,000 | $90,000 |
| Closing Costs | $18,000 | $0 |
| Mortgage Term | 15 Years | 15 Years |
| Mortgage Principal | $360,000 | $378,000 |
| Mortgage Rate | 2% | 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 And Cons of a No-Closing-Cost Mortgage | |
|---|---|
| Pros | Cons |
| Fewer Upfront Costs | Higher Mortgage Principal |
| More Money For Down Payment | Higher Mortgage Rate |
| Less Time Needed to Break Even | Higher Monthly Payments |
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.
Additional Ways to Reduce Closing Costs
Considering that a no-closing cost mortgage only allows you to finance closing costs, you may want to find ways to reduce expenses altogether. Some methods to achieve this are:
Asking the Seller to Pay
In some cases, you may be able to negotiate with the seller and ask them to pay a portion or all of your closing costs. This is more common in situations where there is a buyers' market or the home has a hig cumulative days on market (CDOM).
Choosing a Lender with No Closing Costs
Some lenders do not charge closing costs, so shopping around and comparing different lenders is essential. Keep in mind, however, that these lenders will likely charge a higher interest rate.
Paying Points to Lower the Interest Rate
If you are considering a no-closing cost mortgage with a higher interest rate, you may be able to lower your interest rate with mortgage discount points . One point is equal to 1% of the loan amount. So, if you are taking out a $200,000 loan, one point would cost $2,000. Paying points can help lower your interest rate, but it will also increase your closing costs. You can use a mortgage points calculator to estimate your savings.
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