In a no-closing cost mortgage, sometimes referred to as a zero-closing cost mortgage, the lender absorbs the closing costs by either charging a higher rate of interest or extending the balance of the loan. Given that upfront costs or closing costs can be significant, a zero-closing cost mortgage can help you purchase your dream home but it will come with an additional cost in the long run. Here's all you need to know about the mortgage product to make an informed decision on whether to opt for a no-closing mortgage or not. In this article, we’ll read about no-closing cost mortgages. Read more about IRR , cash on cash return and prorated rent.
What Are Closing Costs?
Closing costs are the upfront costs that you pay when closing on the purchase of a property. These expenses include attorney's fees, application fees, government recording fees, and discount points if any or applicable. The total closing costs together with the estate sale taxes and commissions can go up to around 15% of the purchase price of a property.
You can expect to pay around 2%-5% of your property's purchase price as your closing costs. Moreover, these costs can get higher if you are required to get mortgage insurance.
What Is a No-Closing Cost Mortgage and How Does It Work?
When you apply for a no-closing cost mortgage, you don't have to pay the above-mentioned costs as your lender will pay them upfront. However, it will be compensated by charging you a higher rate of interest for the loan duration.
Think of it as your lender covering your property's upfront costs to complete the purchase transaction. You pay your lender back through higher monthly installments. This will save you from investing higher cash initially but the amount you pay in the long run will be more or the same when compared to a traditional mortgage.
Moreover, lenders often include a prepayment penalty provision in their loan agreements to discourage buyers of property from refinancing to a lower rate of interest before they have recovered their costs.
How To Avail of a No-Closing Cost Mortgage?
Just like other mortgage cost options, lenders have minimum qualification requirements and different offerings for a no-closing cost mortgage.
The financial institution or lender may the following factors into consideration while providing a no-closing cost mortgage –
- Credit History
- Credit Score
- Financial Profile
- Employment History
When you are looking for lenders offering no-closing mortgages, it is essential to understand how transparent their terms and conditions are.
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No-Closing Cost Mortgages: Pros and Cons
Just like other mortgage loans, there are pros and cons to a no-closing cost mortgage as well.
Pros:
- Low upfront charges can allow you to purchase your new home easily as it reduces the initial cash payment significantly.
- This will allow you to save money for emergency expenses.
- You can also afford a bigger down payment as you are not required to pay the closing costs upfront.
Cons:
- It can become more expensive over time as the interest rate will get higher over the course of the loan.
- Your monthly payments will be higher compared to a traditional mortgage cost.
- If your lender rolls over your closing expenses into your mortgage, then you will be required to repay a larger loan.
Other Ways To Reduce Upfront Costs
If you don't like the terms and conditions of a no-closing cost mortgage, you can opt for other options to significantly lower your upfront costs.
You can negotiate with your financial institution or lender to waive or reduce some fees. This will allow you to understand how you can lessen the upfront costs without going overboard with the interest rates in the long run.
You can also ask your seller of the property to chip in. Based on how much they want to push through the sale, some sellers may approve of covering a part of the closing costs.
Another affordable option is the financial assistance offered by the Housing Finance Agency (HFA) of your state in partnership with a local financial institution. Different states offer different HFA homeownership programs but all are directed at making mortgages affordable and promoting homeownership for first-time buyers and low-and-moderate income households.
Eligible borrowers can avail first-lien mortgage products from HFAs which offer reduced rates of interest and low down payment. It also offers closing cost assistance to borrowers.
Concluding Thoughts
Having a fair idea of how long you are intending to stay in your current home can assist you with your decision-making process. A no-closing cost mortgage may appear to be an ideal deal initially, but a closer examination reveals the possibility of paying additional costs in the long run. Closing costs are not waived; they are adjusted in the future with your monthly installments or interest rates. Run the numbers. Check how much the deal will cost over time and how much will you save in comparison to a traditional mortgage option. This will allow you to make the best financial decision when purchasing a property.
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