Mortgage Daily

Published On: December 23, 2022

Mortgage Closing Costs Are Optional

Every mortgage has closing charges. However, paying these charges out of pocket is only sometimes necessary.

If you choose not to pay closing fees in cash, you may be allowed to add them to your loan balance. Alternatively, some lenders may cover your fees for a slightly higher interest rate.

Here are the steps you must take to qualify for a co-closing-cost mortgage.

What Is a Mortgage With No Closing Costs?

A mortgage with no closing costs, or a refinancing with no closing costs, is different from what it sounds like. Still, there are closing charges. However, you do not pay them directly.

With a mortgage with no closing costs, the lender pays for all or a portion of your closing expenses. In return, you are charged a higher interest rate. In the long run, the lender’s earnings from your higher interest rate reimburse your closing costs.

In most instances, lenders can pay all or a portion of your closing expenses, such as loan origination fees, appraisal fees, title search and title insurance, and prepaid taxes and insurance.

How Much Are Closing Costs for a Mortgage?

Typically, closing expenses vary between 2 and 5 percent of the home’s purchase price. Certain charges, including underwriting and loan origination fees, are assessed as a percentage of the loan amount. Other expenses, like the cost of the house appraisal, are billed as flat fees.

Closing costs, such as transfer taxes and homeowners insurance premiums, might vary according to the season.

Refer to this comprehensive list of mortgage closing expenses for further information.

How Does a No-Closing-Cost Mortgage Work?

There are several methods to create a mortgage with no closing costs. A lender may cover all of your upfront charges or a portion of your closing costs.

The quantity and nature of closing fees borne by your lender will impact your interest rate. Therefore, it is essential to compare offerings on an equal level.

As you evaluate zero-interest deals, ensure each lender has the same features. For instance:

  • A mortgage lender may pay lender fees but not third-party costs or prepaid products (upfront property taxes and homeowners insurance)
  • A lender can pay lender fees and third-party expenses but not prepaid things.
  • A mortgage lender may absorb all costs, including loan fees and prepayment penalties.

A lender who pays for all three of your closing expenses will typically demand a higher interest rate. In contrast, a lender that offers a cheaper interest rate typically covers its expenses, not those of the appraiser, title firm, or escrow service.

Examples of No-Closing-Cost Mortgages

For instance, your different rate and fee options for a no-closing-cost mortgage would seem as follows:

  • 5% rate: The borrower is responsible for all closing expenses, including lender and third-party fees and prepayment expenditures.
  • 5.125% rate: The borrower pays third-party charges and prepaid costs but no lender fees.
  • 5.5% rate: The borrower pays prepaid costs and no lender or third-party fees.
  • 5.625% rate: The borrower incurs no out-of-pocket expenses.

These alternatives could be better. Borrowers should recognize that lower rates incur greater upfront costs, whereas higher rates incur fewer upfront costs.

“As a general rule, the agreement should reduce your monthly payment to the point where you save enough to make the refinance worthwhile, even if it’s free,” says Jon Meyer, The Mortgage Reports lending expert, and qualified MLO.

Lenders will boost your interest rate and utilize the additional earnings from the loan to cover your closing fees. You must determine if the upfront savings are worth the higher interest rate and monthly payment.

Types of Mortgages With No Closing Costs

Depending on the lender, a mortgage loan with no closing costs may also be referred to as:

  • A zero-cost mortgage
  • A no-cost mortgage
  • Credits extended by creditors
  • Rebate pricing
  • Lender-paid settlement charges

These names allude to the same arrangement: you will pay a higher interest rate to cover the lender’s closing expenses. Refrain from being misled by a lender’s language into believing that your loan has no closing expenses. However, you are not paying them in advance.

Consider Your Future Expenses

There’s no free lunch here. If you keep the loan for an extended period, you may pay more interest than you would have in closing expenses.

Before picking between a no-closing-cost refinance and a home purchase loan, you should consider how long you want to maintain your new loan.

However, if you’re ready to purchase a new home or refinance your current one but lack the down payment, a zero-cost mortgage might be a sensible way to lock in today’s rates without waiting and saving up.

Cons of No-Closing-Cost Mortgages

The disadvantage of a mortgage with no closing costs is a higher interest rate. A slight rise in your interest rate might cost you hundreds of dollars more over the life of your loan.

“As long as you are saving money, paying 0.25% to 0.375% more than the lowest available rate shouldn’t matter too much,” advises Meyer.

However, you should keep the increase in interest rates in context.

While mortgage rates are on the rise, current rates remain low. Consequently, many borrowers may accept a higher interest rate and still “save” compared to homeowners who purchased or refinanced a property a decade ago.

Imagine being given a 5.5% 30-year fixed mortgage rate. Your lender will reimburse closing expenses but boost your interest rate to 6.25 percent.

This is a significant increase from your initial pricing offer. However, 6.25 percent is still less than the historical average for 30-year fixed-rate loans, less than most borrowers would have paid before the early 2000s.

Yes, you should obtain the lowest rate possible to save money over time. However, if a no-closing-cost loan is your sole option for homeownership or refinancing, it is a good offer.

You must be aware of the tradeoff between zero upfront expenditures and higher long-term costs to make the appropriate selection.

No-Closing-Cost Refinance

A no-closing-cost refinance can be advantageous since it eliminates the major disadvantage of refinancing: the closing costs.

For this to work, however, your new interest rate must be sufficiently lower than your previous loan to generate savings.

A higher interest rate will increase the monthly payment and the total cost over time. Before employing a no-fee refinancing, you should evaluate the following factors:

  • Will your monthly payments be lowered despite the elimination of closing costs?
  • How long do you intend to maintain the mortgage before relocating or refinancing?
  • How much additional interest will you have paid when you sell or refinance? Is this cost more or less than paying closing fees in advance?

Identifying the “Break-Even Point”

The longer you maintain a high-interest rate, the more expensive it becomes. At some point throughout the life of a no-closing-cost refinancing, the additional interest you pay will surpass the money you saved up front.

The moment at which interest costs begin to exceed savings is known as the “break-even point.”

A mortgage calculator can assist you in determining your point of break-even.

Compare the monthly payment of your mortgage at various interest rates to see how much extra you would pay each month if the lender pays your closing fees.

If a no-cost mortgage increases your monthly payment by $100 and your lender pays $4,000 in closing costs, you would break even after 40 mortgage payments, or three years and four months.

Is No-Closing-Cost Refinancing Worth It?

This loan makes the most sense if you intend to relocate or refinance before breaking even.

However, a no-closing-cost refinance may make sense if you need to reduce your monthly payment — free up cash for other bills — but lack the funds to pay the refinance’s closing charges. In such a situation, short-term savings may be more essential than a long-term expenses.

No-Closing-Cost Mortgage Options

Those who want to remain in their houses for an extended period would pay more during the life of this loan. However, homeowners who plan to sell or refinance over the next several years may benefit from a loan with no closing costs. Nonetheless, borrowers have choices for avoiding closing costs.

  • Include closing costs in the loan amount
  • Leverage your broker’s yield spread premium (YSP) against your closing fees.

Adding Closing Costs Into Your Mortgage

When refinancing, a zero-cost loan is not the only approach to avoid closing fees. The majority of homeowners have the option to include closing expenses in their new loan balance.

Rolling closing fees into your loan differs from refinancing with no closing charges.

By adding closing expenses to the principle balance of your mortgage, you will pay extra interest over the life of the loan. However, your real interest rate remains unchanged.

In contrast, a no-cost mortgage refinancing maintains the same loan balance but raises the interest rate.

Is It Wise to Include Closing Expenses in a Loan?

Maintaining a lower interest rate by including closing fees in the loan may save you additional money. But it also raises your loan-to-value ratio (LTV), which may affect your ability to refinance or cancel your private mortgage insurance (PMI).

Your possibilities for refinancing depend on the sort of loan you currently own.

FHA Streamline Refinance programs, for instance, let applicants include just upfront mortgage insurance premiums in the loan amount. All remaining closing charges must be paid personally.

Closing expenses may only be added to the loan sum when refinancing, not when purchasing a house. However, a no-closing-cost loan with a higher interest rate is available when purchasing real estate.

The appropriate no-cost choice depends on the specifics of your mortgage.

When looking for refinancing possibilities, you may evaluate both alternatives to see which makes the most sense given your financial circumstances.

No-Closing-Cost Mortgages From a Lender

A no-closing-cost loan seems slightly different when you directly engage with a mortgage broker instead of a lender. This is because the broker is a middleman. Brokers can assist you in negotiating your loan’s rate and terms, but they do not control the final lender’s price.

Nevertheless, a no-cost loan is still available through a mortgage broker. You only need to understand how they operate.

As compensation for their services, mortgage brokers earn a yield spread premium, or YSP, on your loan.

The final lender pays this charge to the mortgage broker for delivering the loan. The YSP is the profit for the mortgage broker

Utilizing YSP to Your Benefit

Since you are familiar with YSP, you may request that your broker utilize it to design your no-cost mortgage.

For example, a broker who receives a 1% YSP from the lender is not required to charge the borrower an origination fee. In this instance, the YSP can reduce out-of-pocket payments by one percent of your loan amount. A broker earning 2% YSP can pay additional closing fees.

Request the same structure from mortgage lenders and brokers when comparing no-cost loans.

In other words, request no-lender-fee deals from everyone. The costs associated with third parties, like an appraisal, credit report, title, escrow, and recording, should be comparable. Your taxes and insurance should remain unchanged regardless of the lender you select.

This allows you to focus just on the interest rate variable.

Tips to Reduce Your No-Closing-Cost Mortgage Rate

The lower your original mortgage rate, the lower your mortgage rate with no closing costs.

Submit a solid mortgage application to obtain a mortgage loan with no fees and a cheap interest rate. Typically, you will receive a lower interest rate if you have the following:

  • A credit score higher than 720
  • A spotless credit report with no payment delays
  • A debt-to-income (DTI) ratio of less than 43%
  • A loan-to-value (LTV) ratio of less than 80% (indicating you have at least 20% equity in your house).
  • A shorter loan duration (if you can afford the higher monthly payment)

Refinancing or purchasing a property with a 20% down payment might help you avoid private mortgage insurance (PMI) and FHA mortgage insurance charges (MIP).

Eliminating mortgage insurance premiums can significantly reduce your monthly payment and make up for the higher interest rate on loans with no fees.

But possibly the most effective strategy to reduce your interest rate is to allow lenders to compete for your business. Obtain two or three estimates. Send the offer with the lowest interest rate and fees to one of the other lenders. Check to see if the lender can beat it.

You may get close to the full closing-cost rate if a significant portion of your closing costs is covered.

FAQ on No-Closing-Cost Mortgages

Who Offers Mortgages With No Closing Costs?

Despite closing costs, several lenders provide house and refinancing loans with no closing costs. Some lenders will cover your closing expenses in return for a higher mortgage interest rate. Compare the higher long-term expenses versus the short-term savings before accepting this type of mortgage. Paying closing fees out of pocket may be more economical.

Can a Home Be Purchased With No Closing Costs?

Real estate transactions necessitate the payment of closing expenses. You could accept a higher interest rate in exchange for your lender’s assistance in covering these costs if you wish to avoid paying them upfront and out of pocket. Sometimes, sellers will assist buyers with closing costs. Additionally, many first-time homebuyers are locally eligible for down payment and closing cost assistance programs.

How Can Closing Costs Be Avoided?

Purchasing a new residence or refinancing an existing mortgage will incur closing charges. However, instead of paying them in full, ask your loan officer to include a portion of them in the loan amount. You may also be eligible for lender credits, which include accepting a higher interest rate in return for assistance with closing costs. Alternatively, ask the seller to assist with closing fees. Sellers aren’t compelled to help. Be cautious about inquiring before entering into a purchase agreement.

What if I Am Unable to Pay the Closing Costs?

There are several methods to seek assistance with paying closing fees. Lenders may offer assistance in return for a higher interest rate or a greater loan amount when refinancing. Assistance programs for the down payment and closing fees may offer grants and low-interest loans. Most of these programs are for first-time homebuyers who have not owned a house for at least three years. Alternatively, you might approach friends and relatives for assistance in achieving your dream of homeownership. Some purchasers can receive assistance from the home’s seller; however, this is likely to fail while competing with other buyers.

Can Closing Fees Be Included in the Mortgage?

Only with a refinancing loan may closing expenses be included in the loan amount, not when purchasing a new house. Even with refinancing, you are limited by your lender’s loan-to-value (LTV) standards. For instance, if you have a property worth $200,000 but can only borrow 80% LTV, your loan can be at most $160,000. If your current mortgage balance is $160,000, there would be no money in the new loan for closing expenses. You might utilize a portion of the cash out from a cash-out refinancing to meet closing fees.

What Are the Mortgage Rates Today?

Purchase and refinancing rates rise from their previous historic lows, yet many consumers still qualify for favorable mortgage rates. As a result, many homebuyers and homeowners may obtain a reasonable interest rate while the lender pays their upfront fees.

Compare no-cost pre-approval offers from many lenders if you pursue this option.

Verify that each lender covers the same closing fees so that you can compare the upfront charges and interest rates.


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