Can’t afford closing costs? What to know about no-closing-cost mortgages

When you’re pushed up against your budget for your dream home, it’s unsettling to think about the big lump sum of money you’ll need to bring on closing day to finalize the transaction. Every home loan (and refinance) includes these costs, but you can avoid them by getting what’s known as a no-closing-cost mortgage. This common mortgage feature typically allows you to roll the closing costs into your loan.

While a no-closing cost mortgage can save you money in the short-term, it may not be the best option in the long-term. Because the costs are added to the loan balance or built into the interest rate, borrowers may end up paying more in interest over the life of the loan. 

Can you roll closing costs into a mortgage?

A no-closing cost mortgage is a type of mortgage where the borrower is not required to pay the traditional closing costs associated with purchasing the house. Instead of paying these costs up front, the lender will typically add them to the loan balance or build them into the interest rate. You may come across certain limitations when it comes to rolling your closing fees into a VA loan or FHA loan.

No-closing cost mortgages may have other names, like zero-cost mortgage or no-cost mortgage. Rolling closing costs may also be referred to as rebate pricing or lender-paid closing costs, too. Make sure to talk to your lender about the details so you know exactly what your loan involves.

Closing costs can be rolled into a refinance when the new mortgage loan being taken out is larger than the outstanding balance on the existing mortgage. The excess funds from the new loan can be used to pay for closing costs, and the remaining balance will be used to pay off the existing mortgage. (This is similar to how a cash-out refinance works.) 

What closing costs can you include in the loan?

Closing costs vary depending on your location, the price of your home, and the amount of your loan. Common closing costs include:

• Loan underwriting expenses
• Mortgage origination fee
• Home inspection fee
• Appraisal fee
• Lender fees
• Deed or mortgage registration taxes
• Recording fees
• Title insurance
• Property taxes
• Homeowners insurance
• Application and processing fees

→ Check out the full list of closing costs here

How no-closing-cost mortgages works

Most of the time, the buyer pays closing costs (the seller often pays some, too) when the lender extends the loan. In a no-closing-cost mortgage, you don’t pay any closing costs when the lender releases the loan because they commit to paying all costs upfront. Instead, you’ll pay back the closing costs later, plus a little extra.

Lenders recoup no-closing-cost mortgage payments in one of two ways. Either they’ll add the closing cost amount to the principal balance of your loan or they’ll charge a higher interest rate to do a no-closing-cost refinance. Either way, you’re going to pay closing costs, making no-closing-cost mortgages a bit of a misnomer.

Add closing fees to the principal 

First, let’s assume a lender agrees to roll your closing costs into your principal loan balance. You’re borrowing $300,000 and your closing costs total $12,000. To cover the closing costs, you’re actually borrowing $312,000, raising the total loan amount — and also the total amount of interest accrued. Your monthly payment had you paid the closing costs would have been $1,896, will go up to $1,972 when you roll them.

→ Use a mortgage calculator to see how much house you can afford

Add closing fees into the interest rate

Other times, the mortgage lender will charge a higher interest rate when you roll closing costs into the loan. If you qualify for a 30-year mortgage with a fixed rate of 6.5%, the lender may offer to round it up to an even 7% to cover your closing costs. $1,996.

If you thought you could game the system by building equity quickly, then refinancing to a lower interest rate, most lenders are already a step or two ahead. When the lenders raise your interest rate, they may add a prepayment penalty provision to a no-closing-cost mortgage to discourage you from refinancing before they’ve recouped your closing costs.

Keep in mind these are just examples; lenders may cover a portion of your closing costs and not others.

→ Learn about what affects mortgage rates

Where can you get a no-closing cost mortgage?

Most mortgage lenders will let you roll closing costs into a mortgage, but you should always ask to confirm. To get a no-closing cost mortgage, borrowers will typically need to meet the same qualifications as they would for a traditional mortgage. This can include having a good credit score and a stable income. Borrowers should also be prepared to provide documentation such as pay stubs and tax returns to verify their income and employment.

It’s also important to shop around and compare terms and rates from different lenders to find the best no-closing cost (or any other type of mortgage) you end up getting. Consulting with a mortgage broker or financial advisor can also be useful when it comes to no-closing cost mortgage options, too, as they can also give you insight on how much you can save and what’s best for your circumstances.

Is rolling your closing costs into the mortgage a good idea?

When it comes to financing real estate purchases, there’s usually a double-edged sword involved. Such is the case with no-closing-cost mortgages.

4 benefits to a no-closing cost mortgage

• Fewer upfront charges will give you more financial flexibility when buying a home — especially if you’re pressing up against the top end of your budget.
• If you’re buying a fixer-upper, adding those extra costs to the total life of your loan will give you more liquid cash to invest in home repair and renovation.
• It’s convenient to pay your closing costs as part of your monthly payment.
• You could put down a higher down payment against the home’s purchase price if the lender covers the closing costs.

4 drawbacks to a no-closing cost mortgage

• You’ll have higher monthly payments.
• You’re almost definitely paying more in the long-term.
• You may have trouble refinancing in the future, due to an increased loan-to-value ratio.
• You may have a harder time selling the home in the future, as the closing costs will not have been paid off, and the new buyers will need to pay them.

Should you get a no-closing-cost mortgage?

Every major financial decision comes down to some calculus of your risk tolerance and plans for the future. The most typical no-closing-cost mortgage customers are first-time and short-term home buyers. The former because many first-time buyers could use a little help getting the cash to cover upfront costs, the latter because they know the long-term impact of higher interest rates will matter less to them.

If you’re cash-strapped but really love a home and feel it’s a great investment, a no-closing-cost mortgage is a reasonable option. Likewise, if you’re moving to an area for work or to care for family but know you won’t be there forever, avoiding major upfront costs isn’t a bad idea either.

Ultimately, no-closing-cost mortgages could be right for some people and are definitely not right for others. It all comes down to your savings, the costs and rate environment, and your longer-term plans. For example when mortgages rates are already low, then rolling closing costs for a little more interest could make sense for you.

Before you decide to sign a no-closing-cost mortgage, look at your total closing cost amount and compare it to the savings you’d get on your monthly payment if you did get a loan without closing fees. That’s an easy way to figure out when the costs of your no-closing-cost mortgage will officially outpace the upfront costs of closing.

No-closing cost loan alternatives

No-closing-cost mortgages aren’t your only option. Closing costs are often negotiable, so you can ask the seller to pay some — or all — of them. This is a particularly viable option if you know the seller has neglected some maintenance or if you’re doing them a favor by waiving an inspection or other contingencies. 

You could even ask the lender if it can waive or discount some charges. They want to give you the mortgage, so they’d rather lose a little money upfront to secure the interest charges over the lifetime of the loan. Even mortgage brokers might cut you some slack if you ask. 

Finally, if you’re refinancing, some lenders allow you to use your home equity to cover closing costs.

Most, though not all, lenders offer no-closing-cost mortgages as an option for cash-strapped buyers. When you’re shopping for a mortgage, and you know closing costs may be a problem for you, speak to lenders about it to see what they might be able to offer. Lenders want your business, so look for the best arrangement that works for you.