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What Is A No-Closing-Cost Mortgage?

4-Minute Read
Published on November 9, 2020
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If you’ve ever bought a home, you’re already familiar with closing costs. These are the fees you pay to close a real estate transaction.

Closing costs include things like origination fees, title insurance, property taxes, escrow fee and more. Overall, these costs typically add up to 2% – 5% of the total loan amount.

That means if you took out a $300,000 mortgage, you can expect to pay up to $15,000 in closing costs. This is why for many borrowers, the idea of a no-closing-cost mortgage probably sounds appealing.

But is a no-closing-cost mortgage really what it sounds like? That’s exactly what this article will discuss.

No-Closing-Cost Mortgages, Defined

In many ways, a no-closing-cost mortgage is a bit of a misnomer since it implies that you get out of paying closing costs altogether. With a traditional mortgage, you would pay these fees out of pocket when you close on your home.

But with a no-closing-cost mortgage, you’ll still pay closing costs, but you won’t have to pay them out of pocket. Instead, they’re folded into your total loan balance and you’ll pay them off over the course of the mortgage’s lifetime.

So unfortunately, you can’t entirely omit closing costs from the picture. But this type of mortgage can temporarily ease some of your financial expenses when buying a home.

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Benefits And Drawbacks Of No-Closing-Cost Mortgages

At first glance, taking out a no-closing-cost mortgage may seem like a no-brainer but it’s not going to be the best decision for everyone. Here are some of the biggest pros and cons you should consider before going this route.

Benefits

The biggest perk of a no-closing-cost mortgage is that it helps free up some of your cash when you’re buying a house so maybe you won’t be so stretched financially.

It’s no secret that homes are expensive and always costs more money than you think. By rolling the closing costs into your mortgage, you’ll free up additional capital to put toward other expenses like a down payment.

A no-closing-cost mortgage can also be a good idea for borrowers who know they probably won’t stay in their homes for more than 5 years. This can be a good way to save on some of the upfront costs.

Drawbacks

The downside to this type of mortgage is that you aren’t eliminating your closing costs, you’re just delaying them. This can sometimes lead to higher mortgage origination fees and a higher interest rate than you would’ve ended up with had you just paid the closing costs out of pocket.

A no-closing-cost loan may seem easier in the short-term and free up some immediate cash. But you could end up paying substantially more over time.

Who Offers No-Closing-Cost Mortgages?

Many lenders other no-closing-cost mortgages to borrowers, including Quicken Loans®. At closing, you’ll roll the associated costs into your mortgage. This will increase your interest rate and your monthly payments.

To qualify for a no-closing-cost mortgage, you’ll need to have a good credit history, a fairly good credit score and a low debt-to-income ratio.

What Types Of Homeowners Benefit Most From No-Closing-Cost Mortgages?

A no-closing-cost mortgage won’t be the right fit for everyone, but certain borrowers can benefit. In particular, it can be helpful for first-time home buyers and borrowers who are only planning to live in their homes for a short period of time.

First-time homeowners can benefit from this arrangement because it can help free up their cash flow to go toward other expenses. And really, it’s ideal for anyone with limited access to cash.

If you don’t plan on staying in your home long-term then you may benefit from a no-closing-cost mortgage as well. That’s because you won’t stay in the loan long enough to pay the full 30-year mortgage.

And this strategy will benefit borrowers who have a high monthly income. Otherwise, it may be too challenging to make the monthly payments.

And there are other options you can consider as well. For instance, it may be possible to have the seller pay for part of the closing costs.

Can You Refinance No-Closing-Cost Mortgages?

Borrowers who refinance their homes have to pay closing costs as well. That’s why a no-closing-cost mortgage is also available to borrowers who are refinancing their homes.

In many ways, a no-closing-cost mortgage refinance is similar to a no-closing-cost mortgage. When you refinance, the closing costs will be rolled into the total cost of the mortgage.

The real downside to this strategy is that you’ll end up with a higher interest rate and higher monthly fees. In many ways, this undercuts the purpose of refinancing your home in the first place since most borrowers refinance to save money on their monthly payments.

But it’s not a bad idea for borrowers who know they’ll be selling their home soon. That’s because they probably wouldn’t stay in the house long enough to recoup the refinance savings anyway.

The Bottom Line

Depending on your situation, a no-closing-cost mortgage may be a good choice for you. Rolling these costs in with your mortgage will raise your monthly payments, but it’ll also free up some cash flow when you’re purchasing your home.

However, before you make a final decision, do your homework. See if there are any other options you can consider, like asking your seller to pay for part of the closing costs.

And be sure to shop around so you’ll find a mortgage with the most flexible terms and best rates possible. If you’re interested in pursuing a no-closing-costs mortgage, contact a Home Loan Expert at Quicken Loans today.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

Start Your Application

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