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No Closing Cost Mortgage Loans

A no closing cost mortgage can save you money upfront but cost more over the long term.
June 20, 2019
Finding the Right Mortgage, Mortgages
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The terms “no closing cost” mortgage or “zero closing costs” home loan are a little misleading. You might think the fees are waived or paid by someone else. But a no closing cost mortgage means that rather than pay the closing costs out of pocket, the charges are folded into your loan balance — or your mortgage interest rate.

It’s also likely that not every single closing cost can be rolled into your loan. While your due-at-signing closing costs may be less with a no closing cost mortgage, you may still be required to pay some fees at the settlement table. Those specifics will vary by lender.

How much are closing costs usually?

Closing costs can be hefty — typically from 2% to 5% of the loan amount. It might help to calculate closing costs for your particular situation.

To get a rough idea, consider that on a $250,000 home you might pay somewhere from $5,000 to $12,500 at the loan settlement table. Closing costs vary widely, depending on your location and your specific situation.

Can you buy a house with no closing costs?

Not really. Closing costs have to be paid one way or the other. Your decision will be whether you pay them with cash when you sign your loan, or as an added expense in each monthly mortgage payment.

There are ways to reduce your closing costs, though, in part by weeding out and negotiating lender fees and third-party charges, such as the appraisal and title search. You may also qualify for closing cost assistance or housing grants through a first-time home buyer program in your state. Many of these grants are essentially free money, meaning they don’t have to be repaid unless you move or refinance your home.

And if you have a military connection, VA loans have a limit on allowed closing costs and don’t require the biggest closing cost of all: a down payment.

» MORE: Best mortgage lenders with no origination fee

How a no closing cost mortgage works

Lenders structure no closing cost loans in two ways. The differences between them are subtle, yet the result is the same.

  1. You finance the closing costs. In this case, the lender will add your closing costs to your total loan balance. Your monthly payments will be slightly higher, and you’ll be paying these closing costs, with interest, for the full term of your loan — so, for example, over a period of 15 or 30 years.
  2. The lender will absorb the closing costs in exchange for a higher interest rate. Again, you’ll pay a bit more each month, and your total interest cost will be greater over the life of the loan.

Either way, your monthly payment rises slightly. You’ll pay less at the closing table, but more over the long term.

Is a no closing cost mortgage right for you?

If you’re going to live in your new home for the long-term, there’s no doubt you’ll pay more over the life of the loan by financing your closing costs or accepting a higher interest rate.

It could cost thousands — or tens of thousands more — depending on how many years you make that higher payment, says Sarah Lindsey, a certified mortgage planning specialist in San Diego.

If you have short-term plans with the financing, not paying closing costs could be a really good strategy.

Sarah Lindsey, certified mortgage planning specialist

But if you plan on moving or refinancing your mortgage within three to five years, the all-in expense of wrapping closing costs into your loan might not be an issue.

“If you have short-term plans with the financing, not paying closing costs could be a really good strategy,” Lindsey adds.

Find ways to lower your closing costs, negotiate the mortgage origination fee — and if this is your forever home, it’s probably best to pay the closing costs up front.

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