What Is a No-Closing-Cost Mortgage?

For new homebuyers, closing costs can be an unexpected additional expense when you’ve already stretched to make the downpayment and other closing expenses. You can expect to pay 3% to 6% of the mortgage loan amount. A no-closing-cost mortgage offers the opportunity to roll the mortgage closing costs into the loan amount. Before you go ahead with a no-closing-cost mortgage, weigh its pros and cons with the detailed review below. 

Understanding No-Closing-Cost Mortgages

A no-closing-cost mortgage is a mortgage loan in which the borrower does not have to pay the usual closing costs associated with obtaining a loan. The closing costs are not waived; instead, you’ll have the opportunity to pay them over time as part of your monthly mortgage payments. 

Suppose you take a loan of $300,000. You can expect to pay between $9,000 and $18,000 in closing costs. The lender must tell you before closing how much you can expect to pay in closing costs. On top of other expenses before closing, mortgage closing costs can be too much for many homebuyers, especially first-time homeowners. 

How Does a No-Closing-Cost Mortgage Work?

Lenders offer a no-closing-cost mortgage as an alternative to help homeowners purchase a property with fewer upfront costs. With this mortgage option, you don’t need to pay the closing costs upfront when buying a new home. 

With a no-closing-cost mortgage, the 3% to 6% closing costs are rolled into the loan balance or compensated for through a higher interest rate. That is the main downside of a no-closing-cost mortgage: You could end up paying more over the life of the home loan. But you’ll pay less upfront, potentially allowing you to move into your home sooner. 

What’s the Difference Between a No-Closing-Cost Mortgage and a Traditional Mortgage?

Conventional mortgages are the most common type of mortgage. Banks, online lenders and credit unions offer traditional mortgages. These lenders require buyers to pay for closing costs at the final sale of the home. Closing costs include title insurance, attorney fees, appraisals, taxes and more. In some cases, this will also include inspections, although you might need to pay for inspections out of pocket.

The difference between a no-closing-cost mortgage and a traditional mortgage is when you have to pay for those expenses. In March 2022, the average mortgage in the U.S. was $460,000. Closing costs on a loan that size could range from $13,800 to $27,600. If you have the savings to pay that amount upfront, you’ll usually save more in interest by using a traditional mortgage to pay closing costs. 

If you don’t have additional savings or have used all your cash reserves for a larger down payment, a no-closing-cost mortgage can be a good option. You might pay a higher interest rate or additional fees to compensate for that convenience 

Can Anyone Qualify for a No-Closing-Cost Mortgage?

Not everyone can qualify for a no-closing-cost mortgage as it requires certain credit scores or financial situations. Generally, you will need a higher credit score and to demonstrate financial stability through long-term employment, lower debt or savings reserves. The specific criteria vary by lender. 

Pros of No-Closing-Cost Mortgages

For many homebuyers, there are significant advantages to a no-closing-cost mortgage. Here’s why you should consider this type of mortgage. 

Lower Upfront Cost

A no-closing-cost mortgage eliminates the need to pay certain fees, such as application fees, appraisal fees and title fees, which can reduce the initial financial burden on the borrower. This can mean you’re able to purchase a home sooner, with lower total upfront costs. 

Increased Cash Flow 

By avoiding upfront closing costs, borrowers may have more cash available to allocate toward other important expenses or investment opportunities. You can use the cash savings for repairs or renovations on the property or to keep a larger emergency fund, relieving some financial pressures. 

Simplified Budgeting

With no-closing-cost mortgages, borrowers have a clearer understanding of their immediate financial obligations because they do not have to allocate funds for closing costs. You’ll know exactly how much you need to pay on the mortgage each month to make budgeting and financial planning easier. 

Cons of No-Closing-Cost Mortgages

While no-closing-cost mortgages offer convenience, you’ll pay for that convenience in higher long-term costs. Here are the disadvantages of this type of mortgage. 

Higher Interest Rates

Lenders often compensate for the waived closing costs by charging borrowers a slightly higher interest rate, resulting in higher monthly payments and increased long-term borrowing costs. 

Depending on interest rates, some mortgage amortization calculators suggest that you’ll pay up to three times as much in closing costs over the loan’s lifetime compared to paying these costs upfront. That means that $12,000 in closing costs could be more than $33,000 paid over time. 

Limited Options

Not all lenders offer no-closing-cost mortgages, which can limit the choices available to borrowers. This can potentially restrict you from finding the most favorable loan terms or lower interest rates. If you’re looking for the best available mortgage terms, a no-closing-cost mortgage often isn’t the best option. 

Reduced Equity

By financing the closing costs, borrowers may see their equity decrease, which can impact future refinancing or home equity loan options. If your goal is to build equity in the home as quickly as possible, a no-closing-cost mortgage usually isn’t the best option. 

Should You Choose a No-Closing-Cost Mortgage?

The pros and cons of no-closing-cost mortgages come down to long-term and short-term cash flow. If a no-closing-cost mortgage means you can purchase your dream property now, it can be a smart choice. But if you have the cash reserves to pay the closing costs upfront, you’ll save more long term, freeing up additional cash for retirement savings or investment. You’ll also have the option to work with more lenders. To get started researching options, find the best mortgage lenders here. 

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