Understanding No-Cost Mortgages

By:
Kara Johnson | November 29, 2011

Is it really possible to get a mortgage and pay no closing costs? The answer is yes, you can – and no, you can’t.

That is, you won’t pay any closing costs up front – but you will pay for them over time.
 
In a zero-closing cost mortgage, lenders charge a higher interest rate to compensate for the fact they’re not collecting any closing costs. They cover your closing costs up front, but gradually get their money back through the higher interest rate – which the borrower pays.
 
So you’re still paying for closing costs, you’re just not doing right up front.
 

Pros and cons

 
No-closing cost mortgages can make financial sense if you have limited funds and need to minimize your cash outlay at the time you take out the mortgage. You may have decided you’d be better off putting your money into a larger down payment, for example.
 
However, you can usually do the same thing by simply rolling the closing costs into your mortgage itself – that is, borrowing the amount of closing costs along with the purchase price of the home, so the only money you’re paying up front is for the down payment. Because you’re staying with a lower interest rate, this can often be a cheaper way to go – but you need to compare what your monthly payments would be under each option.
 

How long will you have the home?

 
One thing to remember is that a zero-closing cost mortgage makes financial sense only if you plan to own the home for a relatively short time – about five to eight years, depending on the terms of your loan. That’s because otherwise you’ll be continuing to pay a higher interest rate well past the point where the lender recouped its closing costs – so it’s strictly gravy for the lender from that point on.
 
You can always refinance the mortgage in a few years to get rid of the higher rate, but given how low mortgage rates are currently, it’s not likely you’ll be able to get a better rate by refinancing a few years from now.
 

What will the interest rate be?

 
Generally speaking, no-cost mortgages will add about half a percentage point onto the interest rate you pay on your mortgage, so if you can get a rate of 4.25 percent on a 30-year fixed-rate mortgage, a zero-cost mortgage might have a rate of 4.75 percent. That could be more or less, depending on what your closing costs would have been otherwise.
 
A final thing to remember is that you may still have to pay some closing costs upfront, even with a zero-cost mortgage. You’ll probably have to pay separately for homeowner’s insurance and property taxes, and individual lenders may vary as to what specific costs they’ll cover in a “no-cost” mortgage. Be sure to find out exactly what costs are and are not covered when comparing offers from different lenders.
 
 

Start here to compare mortgage rates from top lenders in our network

Low Mortgage rates is our mission

Bringing the best rates on the market to
you is our primary focus. Fill the form to get a quote based on your conditions.
/Mortgageloan.com

SecureRights Policy

  • New Home

    Looking to get on the property ladder? Discover your spending power. Get a rate quote today.

  • Debt Consolidation

    Are your debt woes getting you down? Explore your options now by filling out our form.

  • Home Equity

    Is fluctuating home value a constant cause for concern? Our advice - take out a new loan today.

  • Mortgage Calculators

    Need help getting a grip on your expenses and finances. Try one of our 137 multipurpose calculators.

Call For Rates

800-419-1494

Speak to a lender now.

We will match calls to our toll free number with our network of lenders.

National Rates

Loan Type Today +/-
30 yr fixed 3.72
15 yr fixed 3.03
5/1 ARM 2.75

Rates may contain points

Compare Rates »

Browse Mortgage Rates

Personal Finance Calculators