No-closing-cost mortgage: How it works, costs, and options

Saving up enough money to make a down payment on a home can be a big enough challenge that it can be hard to imagine having enough left over to also cover your closing costs. After your down payment, closing costs typically add another 3% - 6% of your home's purchase price to your expenses.

One option that can alleviate some of the pressure of these upfront costs is a no-closing-cost mortgage. This means your lender covers the up-front closing costs in exchange for a higher interest rate or they roll your closing costs into your total loan amount.

While this can reduce your immediate financial burden, you’ll ultimately pay more over the life of your loan because of the increased monthly payments. Here’s a closer look at what a no-closing-cost mortgage is and when it can make sense for your financial situation.

Key takeaways:

• Lenders offset upfront fees by increasing your mortgage interest rate or rolling the costs into the principal loan balance, which increases your total repayment amount over time.
• Avoiding upfront closing costs leaves you with cash for down payments, repairs, or emergency savings, but increases monthly payments and total interest paid.
• A no-closing-cost mortgage makes financial sense if you plan to move or refinance¹ before reaching your break-even point, while paying costs upfront is typically cheaper if you stay in the home long term.

What is a no-closing-cost mortgage?

A no-closing-cost mortgage, also known as a zero-closing-cost mortgage, is a home loan where your lender pays the up-front closing costs on your behalf. In exchange, you accept a higher mortgage interest rate or roll the closing fees into the total loan balance.

If you’re a first-time home buyer, you’re likely saving for both a down payment and closing costs, which can be a major hurdle to homeownership. When you're already stretching your budget, having to pay thousands more at closing can feel impossible.

A no-closing-cost mortgage can help you manage the upfront costs of buying a home. However, this does not mean the fees disappear. Instead, you will pay them over time through higher monthly payments or added debt.

What closing costs may be covered?

Depending on the lender and specific loan agreement, a no-closing-cost mortgage can cover standard third-party and lender fees:

• Mortgage origination, application, and processing fees
• Home appraisal fees
• Title search and title insurance premiums
• Lender’s title insurance
• Credit report fees
• Recording and document preparation fees

What closing costs may not be covered?

Not all settlement charges can be absorbed by the lender. Borrowers are typically still responsible for out-of-pocket prepaid items, including:

• Prepaid property taxes
• Initial homeowners insurance premiums
• Prepaid mortgage interest accruing between closing and the first monthly billing cycle
• Initial escrow account reserves
• Owner's title policy
• Private mortgage insurance (if needed)

How much are mortgage closing costs?

Closing costs typically range from 3% - 6% of your home's purchase price. On a $300,000 home, that means you could pay between $9,000 and $18,000 in closing costs alone.

Your lender is required to give you the final cost breakdown in your Closing Disclosure at least 3 days before closing on your mortgage.

Some common closing costs include:

• Home appraisal fees
• Title insurance
• Property taxes
• Homeowners insurance
• Mortgage origination fees
• Application fees
• Processing fees

How much are closing costs on a $400,000 mortgage?

For example, let’s say you’re taking out a $400,000 mortgage. You can expect your closing costs to range between 3% - 6% of the total loan amount. For a $400,000 mortgage, that means your closing costs will likely run between $12,000 and $24,000.

How do no-closing-cost mortgages work?

A no-closing-cost mortgage doesn’t mean you get out of paying closing fees. Instead, you’ll pay your closing costs over time through a higher interest rate or larger loan amount.

Higher interest rate

With this option, the lender provides lender credits to cover your upfront settlement charges at closing. In return, the lender charges a higher interest rate on your mortgage.

For example, instead of paying $15,000 in closing costs up front, you might see your interest rate increase by 0.25% to 0.5%. Over a 30-year loan, this translates to an additional $50 to $150 in your monthly payment, depending on your loan amount.

This will leave you with more cash immediately available for other homeownership expenses, emergency funds, or home improvements. However, you'll build equity more slowly since a larger portion of your monthly payment will go toward interest. That slower equity growth also shows up in your mortgage amortization schedule, which shifts more of each payment toward interest in the early years.

Rolled into the loan

Another option is to have eligible closing costs added directly to your principal mortgage balance. If you borrow $400,000 and have $12,000 in closing fees, your new starting loan balance becomes $412,000. While your interest rate remains at market level, you will pay monthly principal and interest on that additional $12,000 over the full loan term.

No-closing-cost mortgage vs. traditional mortgage

Whether you save or lose money with a no-closing-cost mortgage often depends on how long you stay in your home.

Let’s say you’re looking at a $415,000 home with a 30-year mortgage at 6.5% interest and $12,450 in closing costs - 3% of the home price.

With a traditional mortgage, you'll pay the $12,450 up front and have monthly payments of $2,623. With a no-closing-cost mortgage, your lender covers those costs but increases your interest rate to approximately 6.75%. This raises your monthly payment to $2,692.

Over time, here’s how the mortgages compare:

In this example, the break-even point happens after about 15 years. If you plan to stay in your home longer than that, paying closing costs up front saves money. If you expect to move or refinance sooner, the no-closing-cost option could work in your favor.

How to calculate your break-even point

Your break-even point is the exact month where the cumulative cost of higher monthly payments equals the upfront cash you saved at closing.

                              Upfront closing costs

Break-even Point (Months) = _________________________

                                         Additional monthly payment

Suppose your closing costs would’ve amounted to $12,450. You opted for a no-closing-cost mortgage and it increased your monthly payment by $69.

$12,450 (upfront savings)

                                         _________________________ = 180.4 months (15 years) 

$69 (monthly difference)

If you keep the loan for fewer than 15 years, the no-closing-cost mortgage is cheaper because the monthly rate increase has not yet surpassed the $12,450 saved upfront. If you keep the loan longer than 15 years, the traditional mortgage saves more money.

No-closing-cost mortgage requirements

If you’re applying for a no-closing-cost mortgage, you can expect lenders to consider the following requirements:

• Credit score: Lenders look at your credit history to determine your eligibility and the interest rate you’re offered. You’ll typically need a credit score of at least 620 to qualify.
• Debt-to-income (DTI) ratio: Accepting a higher interest rate or financing fees increases your monthly payment, so your DTI will typically have to fall below 50%.
• Equity and loan-to-value (LTV): When rolling costs into the loan balance, your post-closing LTV ratio cannot exceed loan program caps - such as 97% LTV for conventional loans or 96.5% for FHA loans.

Pros and cons of no-closing-cost mortgages

As with any type of loan, no-closing-cost mortgages have both benefits and drawbacks.

Pros of no-closing-cost mortgages

Some of the benefits of a no-closing-cost mortgage include:

• Lower up-front costs: You can save your cash for unexpected expenses or home improvements, which can come in very handy during the stressful transition period of homeownership.
• More money toward a down payment: By redirecting closing cost funds to your down payment, you might avoid private mortgage insurance or get better loan terms. A larger down payment also means you start with more equity in your home.
• Ability to buy sooner: Instead of waiting for months or years to save for both a down payment and closing costs, first-time home buyers can start building equity faster instead of paying rent.

Cons of no-closing-cost mortgages

It’s also important to understand the downsides of a no-closing-cost mortgage, such as:

• Higher monthly payments: Rolling your closing costs into your mortgage increases your monthly principal and interest payment for the life of the loan.
• Higher total interest costs: The elevated interest rate compounds over time, so a no-closing-cost mortgage can end up being thousands more than a traditional mortgage. This relationship between interest rate vs home price becomes more important the longer you stay in your home.
• Fewer lender options: Not all lenders offer no-closing-cost mortgages, which can limit your ability to choose a mortgage lender with the best rates and terms.
• Less equity built up front: With higher monthly payments, more of your money goes toward interest instead of the principal. This can limit your options for home equity loans² or cash-out refinancing down the road.

When does a no-closing-cost mortgage make sense?

Let’s look at when a no-closing-cost mortgage can be worthwhile and when it isn’t.

If you plan to move or refinance soon

If you expect to sell the property or refinance your mortgage within 3 - 7 years, a no-closing-cost mortgage can be worth it. You won’t have to put down as much money upfront and then you can exit the loan before the higher monthly payments exceed the initial fee savings, if your loan doesn't carry a prepayment penalty that would eat into those savings.

If you plan to stay in the home long term

If you intend to remain in the home for 10, 20, or 30 years, paying closing costs upfront through a traditional mortgage saves money. Over several decades, the lower interest rate saves thousands of dollars in cumulative interest.

Alternatives to no-closing-cost mortgages

There are more paths to homeownership besides a no-closing-cost mortgage. Here are a few options you can consider, especially when thinking about initial costs:

• Negotiate with your seller: Ask the seller to cover a part or all of your closing costs as part of your purchase offer. In buyer-friendly conditions, sellers may agree to help close the deal, but in competitive markets, this may not work.
• Look into first-time buyer programs: Some state and local governments offer grants and low-interest loans for qualified buyers. Make sure to research your options.
• Consider a personal loan: This option often isn’t ideal because of high interest rates, but it might make sense if you can pay it off quickly and secure a better mortgage rate.

FAQ

Here are the answers to some commonly asked questions about no-closing-cost mortgages.

Is it possible to buy a house without closing costs?

Yes, you can structure a home purchase with zero upfront closing costs in exchange for a higher interest rate, rolling eligible fees into the loan balance, or negotiating seller concessions. While you won’t pay these costs upfront, you’ll still pay them over time.

Who offers no-closing-cost mortgages?

Lenders vary in almost every aspect of what they offer and who they’ll offer to, and no-closing-cost mortgages are no different. Lenders will consider a number of factors when deciding whether to lend money to a borrower, including credit score, credit history, employment, and many more.

Can you roll closing costs into the mortgage?

Yes, you can roll closing costs into your mortgage. However, not all lenders allow you to, and the rules can vary depending on the type of mortgage you’re getting. If you choose to roll your closing costs into your mortgage, you’ll have to pay interest on those costs over the life of your loan.

Can you refinance a mortgage without closing costs?

Like a no-closing-cost mortgage, it’s possible to refinance without paying closing costs. Instead, you’ll either pay a higher interest rate or roll the closing costs into your loan amount.

The bottom line: A no-closing-cost mortgage may be right for you

A no-closing-cost mortgage can be a useful tool for buyers who have limited funds to pay upfront. It can be a smart option when you need to keep your cash for other things or plan to move within 10 – 15 years. If money is tight but you're ready to buy a home, it’ll help you get started sooner.

If you can afford to pay closing costs up front and plan to stay in your home for a while, paying those costs now will save you money over time. Calculate your break-even point and evaluate your long-term housing timeline before choosing between a no-closing-cost loan and a traditional mortgage.

The Home Loan Experts at Rocket Mortgage will help you find the right home loan option for you. You can start your application today.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.