Mortgage No Down Payment No Closing Costs

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Mortgage No Down Payment No Closing Costs

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Every home loan and refinance comes with closing costs, which can be a hindrance if you lack the cash needed to close the deal. That’s where a no closing cost mortgage comes in. Instead of paying closing costs in a lump sum when you buy a home, various fees are rolled into the loan balance or rolled into your mortgage interest rate.

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Sound like a good deal? It can be, but only after weighing the pros and cons. Here’s how no-cost mortgages work and how to decide if one is right for you.

The name “no closing cost mortgage” is a bit of a misnomer. Closing costs don’t magically disappear. You just don’t pay them all at once, in cash, on closing day.

“You will still be responsible for these fees,” says Chuck Meier, senior vice president and director of mortgage sales for St. Paul, Minnesota-based Sunrise Banks. “The only difference is that with a no-closing-cost mortgage, your lender will either add those fees to your principal balance or charge you a higher loan interest rate to cover those closing costs.”

Virtually every home buyer incurs closing costs, which typically include fees for expenses such as a home inspection, home appraisal, title fees, municipal deed or mortgage registration tax, and recording fees. Closing costs may also include costs associated with underwriting, processing and issuing the mortgage itself. Average closing costs nationwide were about $6,905 as of 2021, according to ClosingCorp.

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When you get a mortgage with no closing costs, you don’t have to pay these fees up front, but you will still have to pay them over the life of the loan. Lenders usually offer several different options, which include:

“With either of these choices, you won’t pay closing costs out of your bank account.” But you’ll still pay these closing costs over the life of your loan,” says Matthew Posey, a certified mortgage planner with Akia Home Loans in Austin, Texas.

No closing cost mortgages are attractive because they allow you to buy a home without having to shell out thousands of extra dollars – at a time when you’re likely feeling constrained by many other costs (down payment and moving costs). However, it is important to think long term. You’ll be paying higher zero-cost mortgage costs for years to come – 15, 30, or however long your mortgage term.

Imagine you plan to buy a $500,000 home with a 20 percent down payment. This means you will need to borrow $400,000 to finance the purchase. You get two offers for 30-year loans, a traditional mortgage with 7 percent interest and a loan with no closing costs at 7.5 percent.

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Let’s say closing costs on a traditional mortgage are 3 percent of the principal — $12,000. Your monthly payment on a traditional loan would be $2,661; the down payment for a non-closing loan would be $2,797.

Just $136 more per month for the no-close option doesn’t sound like much. But see how it adds up over time, according to the loan amortization calculator.

With a no-closing-cost mortgage, you’ll pay less until the end of year 10 of your loan, although you’ll also build up slightly less home equity. But then, the accumulated cost (increased by the additional interest) starts to appear. By the end of the mortgage term, the total cost of a traditional loan comes to nearly $37,000 less than the cost of its non-closing counterpart.

Case in point: Using the previous scenario, if you borrow $400,000 over 30 years at a 7 percent interest rate and pay your $12,000 closing costs out of pocket on closing day, your total mortgage cost — principal and interest only — will be $957,970 until the end of the mandate. However, if you choose to roll your closing costs into your mortgage, now with a higher interest rate (from 7 to 7.5 percent), your total loan costs over 30 years would be $1,006,920.

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No closing cost home mortgages have pros and cons, and not everyone is a good candidate for them. It’s generally best for those buying a starter or temporary home that they’ll leave within a decade (as opposed to buying a forever home). Or, of course, it can work well for those who don’t have enough money, so paying five figures up front is a real problem.

Before you commit to a no-closing-cost arrangement, consider how long you plan to stay in the home and how much money you have on hand that you’re willing to part with up front.

So who offers mortgages with no closing costs? Most lenders do this. If you decide to take out a zero cost mortgage, take your time to shop around and find the right lender for your needs. As you compare lenders, make sure you understand all aspects of the loan offer, including closing costs and any no-closing-cost options. A mortgage calculator can help

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