No-Closing-Cost Mortgage: What Is It And Is It Right For You?

When you’re going through the home buying process and applying for a mortgage, there are a few expenses that might feel inevitable – a down payment, homeowners insurance and closing costs, to name a few – and they can add up quickly. If you’re looking to keep these costs lower, consider a no-closing-cost mortgage.

Let’s look at how this mortgage works, what’s included in closing costs and how much they typically add up to when buying a house. We’ll also look at the pros and cons of this type of mortgage to help you decide if this is the right loan option for you.

What Are Closing Costs?

Closing costs are the many different fees and costs associated with processing your mortgage. If you’re buying a house, you can expect to pay an average of 3% – 6% in closing costs. So, if your loan amount is $300,000, you’ll pay about $9,000 – $18,000 in closing costs. Note that this amount is in addition to your down payment. According to data from the U.S. Census Bureau, the average sales price for homes sold during the third quarter of 2023 was $513,400, which means closing costs were between $15,402 and $30,804.

Closing costs generally include some of the following fees and taxes. The fees you’re charged will depend on your loan type and whether you carry mortgage insurance:

• Appraisal fees
• Attorney fees
• Closing fee
• Courier fee
• Credit report and monitoring fees
• Discount points
• Escrow funds
• Flood certification
• Homeowners insurance
• Home inspection fee
• Mortgage insurance premium
• Mortgage origination fees
• Prepaid interest
• Private mortgage insurance
• Property taxes
• Rate lock fee
• Recording fee
• Survey fee
• Title insurance fee
• Title search fee
• Transfer tax
• USDA Guarantee fee
• VA funding fee

What Is A No-Closing-Cost Mortgage?

A no-closing-cost mortgage is a bit of a misnomer. It technically should be called a “no-upfront-closing-cost mortgage” or “closing-costs-rolled-into-your-monthly-payment mortgage.”

With this type of home loan, the closing costs remain, but you don’t have to pay them upfront at closing. Your lender will pay them for you. These costs are often then added to your mortgage loan amount, and you’ll pay on them each month as you make your monthly loan payment. In return for not paying these closing costs upfront, you’ll have a mortgage rate that’s slightly higher.

No-closing-cost mortgages are generally available for both buying a new home and for refinancing your current loan. This may vary from lender to lender, so make sure you look into your specific lender’s offerings for purchase and refinance loans.

How A Mortgage With No Closing Costs Works

Most lenders offer this type of mortgage, giving buyers and homeowners short-term cash savings. Although a no-closing-cost mortgage involves no cash to close the loan, lenders recoup closing costs in two ways.

Your lender will pay the upfront closing costs and charge you a slightly higher interest rate on the home loan. The other way is to roll the closing costs into the loan principal, which increases the loan amount and gives the buyer a higher monthly mortgage payment. A no-closing-cost mortgage gives you a little more financial wiggle room and allows you to spread out closing costs instead of paying it all upfront.

No-Closing-Cost Mortgage Vs. Traditional Mortgage

A traditional mortgage requires buyers and homeowners to pay their portion of closing costs out of pocket on closing day when final loan documents are signed. This is a single payment that’s over and done with after closing. With a no-closing-cost mortgage, the payment is spread out over the life of the loan. This type of arrangement is appealing as it allows you to save money, but it also means you’ll be paying more money on the loan in total.

Pros And Cons Of A No-Closing-Cost Mortgage

As with any financial product, there are positives and negatives to no-closing-cost mortgages.

Pros

Some pros of no-closing-cost mortgages are as follows:

• Upfront savings: You won’t have to pay as much upfront. That 3% – 6% can add up!
• Homeownership is more accessible: Because you no longer have to save money for upfront closing costs, you can become a homeowner sooner than you’d be able to with a traditional mortgage.
• More cash on hand: You pay less money out of pocket, which can help you avoid dipping into savings or other funds. This can also help you make a larger down payment.

Cons

Some cons of no-closing-cost mortgages:

• Higher monthly payments: Your monthly payment may likely be higher, in order to cover those closing costs.
• Potentially higher interest rate: Your interest rate could be higher than it would have been if you paid closing costs upfront.
• Higher cost over time: You will likely pay more in interest over the loan’s term, so the costs may add up to more than the original closing costs.
• Limited lender options: Your lender may require a higher credit score and a more stringent employment history to qualify.

How To Get A No-Closing-Cost Mortgage

Getting a mortgage with no closing costs will likely be the same as a traditional mortgage, but lenders will likely have different eligibility criteria and requirements. If you decide to pursue a no-closing-cost mortgage, make sure you compare multiple lenders to better understand your loan offer and how much more you’ll likely pay compared to a traditional mortgage.

No-Closing-Cost Mortgage FAQs

Here are the most frequently asked questions about no-closing-cost mortgages.

Should I get a no-closing-cost mortgage?

It’s better to pay closing costs upfront if you have the money. However, if you’re a first-time home buyer or if you have limited funds, then a no-closing-cost mortgage can make homeownership more accessible.

Can I roll closing costs into a mortgage?

Yes, but not every loan type and lender offer this possibility, so check with your lender. In general, though, to roll your closing costs into your mortgage, you’ll take a higher interest rate. Your lender will pay your closing costs and often will add the amount to your loan amount. You’ll pay down your closing costs as you make your mortgage payments.

Who offers no-closing-cost mortgages?

Many lenders offer no-closing-cost mortgages. However, qualifying for one will depend on the particular lender’s rules and eligibility requirements and your own financial situation.

Can I refinance my mortgage with no closing costs?

Yes, you can refinance your mortgage and opt for a no-closing-cost mortgage. Your lender will pay closing costs for you. In exchange, the lender may increase your interest rate or roll your closing costs into the loan.

Can I negotiate closing costs with a no-closing-cost mortgage?

You can try to negotiate closing costs with a no-closing-cost mortgage. Your lender may be able to waive or reduce some fees or give you other options.

Is there closing cost assistance available?

If you can’t afford to pay closing costs upfront, you can apply for a no-closing-cost mortgage, negotiate with your lender to get some closing costs waived or reduced, make a smaller down payment or negotiate closing costs with the seller to see if they’ll cover some costs for you. Not all of these will necessarily be a possibility in every case, but it can’t hurt to do some research and check with your lender.

The Bottom Line

A no-closing-cost mortgage has its benefits and drawbacks that can make it the right choice for certain situations. If you’re willing to take a higher interest rate to avoid the upfront closing costs, this might be a good solution for you. 

Start on a mortgage application today to determine what you can afford and whether a no-closing-cost mortgage is right for you.