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A no closing cost mortgage, sometimes called a no closing cost mortgage, is when your lender covers your closing costs to complete the purchase of your home. In exchange, however, you should expect to pay a higher interest rate on your loan.
Since closing costs can be significant, a no-closing-cost mortgage is one way to afford your dream home, but you can expect it to cost you more in the long run. Here’s a breakdown of this mortgage product so you can make an informed decision if this is the right option for you.
What are closing costs?
Closing costs are the expenses you pay when you complete the purchase of a home or other property. These include filing fees, attorney’s fees, and remittance points, if applicable. With real estate sales commissions and taxes included, total closing costs can approach 15% of a property’s purchase price.
You should expect to pay between 2% and 5% of the purchase price of your property in closing costs. If you also need to purchase mortgage insurance, these costs can be even higher.
What is a No Closing Cost Mortgage?
Applying for a no-closing-cost mortgage means you don’t have to worry about the fees mentioned above, as your lender will commit to prepaying them and offsetting it by charging you an interest rate. higher interest over the life of the loan.
How does a mortgage with no closing costs work?
Although you don’t have to pay closing costs up front, your lender will roll them into larger monthly payments with interest for the duration of your loan. Think of it as the lender covering your costs to help you complete the home buying transaction. You then repay them (in addition to the mortgage loan) with higher monthly payments.
So while you don’t have to deposit as much money upfront, the amount you’ll pay over time will be the same or more compared to a conventional mortgage. In fact, it’s probably going to cost more in the long run given the higher interest rate on a mortgage with no closing costs. This will erode any savings you might have had from not having to pay closing costs.
Additionally, lenders may also include a prepayment penalty clause in the loan agreement to deter you from refinancing at a lower interest rate before they have recouped their costs.
Pros and Cons of No Closing Cost Mortgages
As with any type of mortgage, there are pros and cons to choosing a no closing cost mortgage.
- Fewer upfront costs can help cushion the blow to your wallet when you buy a new home. This is especially true if you are a first-time home buyer or if you don’t plan to live in the property for a long time.
- Being able to deposit less money up front means you’ll have more money left over in savings for any other emergency expenses.
- You may be able to spend more money on a larger down payment if you don’t need to pay closing costs right away.
- This could be more expensive in the long run, especially if you plan to live in the property for a long time, due to the higher interest rate over the life of the loan.
- In the short term, you’ll have higher monthly payments compared to a loan where you pay closing costs up front.
- If your lender chooses to roll your closing costs into your mortgage, then you have a bigger loan to pay off.
How to get a mortgage with no closing costs
Just like other mortgage options, lenders have different offers and minimum qualification requirements.
For a mortgage with no closing costs, you can expect the financial institution to consider your:
- Credit score
- credit history
- Employment history
- Financial profile
When researching lenders and inquiring about no closing cost mortgages, it’s important to assess how transparent they are about their terms and conditions. You want a lender that communicates clearly about all aspects of your loan, including closing costs.
If you decide a no-closing-cost mortgage isn’t right for you, there are other ways to lower your upfront costs.
You can try to negotiate with your lender to get certain fees waived or reduced. This will give you an idea of your options and how you can reduce initial costs.
Another option is to ask the seller to contribute. Depending on how much they want the sale to go through, some sellers may agree to help by covering some of the closing costs.
Another affordable mortgage option is financial assistance provided by your state’s Housing Finance Agency (HFA), usually in partnership with a local lender. HFA homeownership programs differ by state, but all aim to promote homeownership and increase mortgage affordability for first-time homebuyers as well as low-income households. low and medium.
HFAs offer first mortgage products to eligible borrowers that require very little money and offer reduced interest rates, as well as assistance with down payment and closing costs. Once these loans are made, the HFAs buy them from the lenders.
Other HFA Home Ownership Programs
These programs include low interest, low (or no) down payment mortgage products and may provide assistance with down payment and closing costs.
- Down payment and assistance with closing costs. HFAs offer a grant or second mortgage to cover your down payment and/or closing costs. Most HFAs require these down payment assistance programs to be used in conjunction with an HFA loan.
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