No-Closing-Cost Mortgage: Does It Make Sense For You?

Buying a home is a big investment. For many people, coming up with the necessary funds to make it possible can make for major financial – and emotional – strain. Fortunately, there are ways to mitigate this burden and manage many of the costs of closing on your new home.

So, what do you do to help with all of these costs? One option that can alleviate some of this upfront financial burden is a no-closing-cost mortgage. In this scenario, the lender will pay for many of the initial closing costs and fees, and then make up for it by charging a higher interest rate over the duration of the loan. This is just like a no-closing-cost refinance, with the only difference being that in a refinance you’re just redoing the financing on your current home instead of a getting a mortgage for the purchase of a new home.

Let’s dive a little deeper into the definition of a no-closing-cost mortgage. When you buy a home, there are a number of different costs and fees that go into what is broadly referred to as “closing costs.” The amount can vary, but depending on a variety of factors, they can quickly become pretty substantial. Applying for a no-closing-cost mortgage helps with these fees, as the lender will commit to paying them up front and making their money up on the back end by charging a higher interest rate for the duration of the loan.

How Much Are Mortgage Closing Costs?

Closing costs can range anywhere from 3 – 6% of the price of the home. Odds are you won’t be blindsided by the closing costs because your lender is required to give you an estimate ahead of time, and you’ll know the actual costs at least 3 business days before closing on your mortgage. Let’s take a look at what some closing costs can include:

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

This list is just a starting point. Depending on your situation, there could be additional fees associated with your closing costs.

To be clear, a no-closing-cost mortgage doesn’t mean you’ll never have to pay closing costs. As you may have guessed, lenders will figure out how to make sure you pay for everything eventually. In this case, the lender rolls the closing costs into larger monthly payments with interest for the duration of your loan.

So, while you don't need to come up with as much money upfront, the amount you pay over time will be comparable to a traditional mortgage, or more. In fact, it’s likely to be more, because the increase in the amount of interest is often more than the initial savings you enjoyed by not paying closing costs upfront.

In addition, lenders may also add a prepayment penalty provision to the loan to discourage you from refinancing again before they’ve recouped their costs. Be sure to do the math to see what makes the most sense, but in most cases paying your closing costs upfront if you can means paying less money overall. Rocket Mortgage® does not have prepayment penalties.

As with any type of loan, there are both benefits and drawbacks to going with a no-closing-cost mortgage. Let’s take a look at some of the pros and cons so you can make the best choice.

Pros Of A No-Closing-Cost Mortgage

• Fewer upfront charges can help relieve the financial burden when you’re purchasing a new home. The types of buyers likely to benefit from this are first-time home buyers and short-term residents. First-time home buyers often have a little more trouble coming up with funds in the beginning of the process, and people who are only planning on living in a home for a short amount of time won’t see the benefits of lower interest over the course of a traditional mortgage.

• Less payment upfront means you will reach your “breakeven” point earlier.

• You may be able to afford a bigger down payment if you don’t need to pay the upfront closing costs.

Cons Of A No-Closing-Cost Mortgage

• It could be more expensive in the long term (especially for those looking to live in their new home for a long time) due to elevated mortgage origination fees and higher interest over the course of the loan.

• There are higher monthly payments compared to a loan where you pay closing costs upfront.

• You might have a larger loan if your lender chooses to roll your closing costs into your mortgage.

Let’s take a look at some of the most common questions people ask when considering a no-closing-cost mortgage.

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 take into account a number of factors when deciding whether to lend money to a borrower, including credit score, credit history, employment and much more. Look for transparency and service level when evaluating lenders and inquiring about no-closing-cost mortgages. For example, Rocket Mortgage offers award-winning client service, which means you can expect clear communication from loan experts about every aspect of your home loan, including closing costs.

We offer no-closing-cost mortgages for those who qualify.

Are there other ways to get a low-closing-cost mortgage?

If you’re thinking that a no-closing-cost mortgage isn’t the right option for you, there are other ways to save on the upfront costs to make sure you get a low-closing-cost mortgage.

You can try negotiating with your lender, as some fees can be either waived or reduced. Talking with your lender can give you a better idea on your options, and you might find a way to reduce upfront costs. Many cities and states also offer first-time home buyer programs to help assist with down payments and closing costs.

Another option is to ask the seller to cover the closing costs for you. Depending on the situation, some sellers may agree to help by covering some of the closing cost.

Can you roll closing costs into the mortgage?

In simple terms, yes – you can roll closing costs into your mortgage, but 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. This essentially means that you’ll be paying much more for these costs than you would paying for them upfront.

The truth is, no-closing-cost mortgages can make a ton of sense for some people and zero sense for others. As a general rule, you’re probably going to pay less over the entire life of a loan if you pay closing costs upfront.

That said, coming up with the necessary funds to do this isn’t always easy, so spreading out the cost of closing over the whole loan term might be the right choice for some. You should do as much research as you can, and don’t stop asking questions to hold your lender accountable in terms of transparency and their laying out every possible option for you.

Don’t know where to start? Check out more mortgage basics articles in the Rocket Mortgage Learning Center. If you think you’re ready to get started, you can apply online or give us a call at (833) 326-6018.