No Cost Mortgage

You may have heard about no closing cost loans or a no cost mortgage but what are they? No closing costs usually means you won't pay any lender fees such as origination points, processing, underwriting, application fees, etc. Sometimes the appraisal fee is also done at "no cost." The third party fees, such as title insurance, closing fee, and your escrow reserves for taxes and insurance will remain your responsibility.

We all know that nothing is free in this world so why would a broker or bank offer no closing costs on a home purchase or no closing cost refinancing? How would they make money? The answer is simple. The lender will charge you a higher interest rate in return for "no closing costs." If you are working with a bank, the bank will collect more interest payments from you over time which offsets the initial up front cost loss that is incurred by waving your fees. If you're working with a mortgage broker, the mortgage broker is paid a higher commission by offering you a higher rate so they will then credit back the cost of fees that need to be paid to the various people involved in your loan transaction.

A no closing cost loan might make sense for somebody who is keeping their loan for a short period of time. Financially, the higher interest rate will cost them much less over the short period they have their loan than higher fees and a low interest rate over that same period.

EXAMPLE:

You want to take out a 30 year fixed mortgage for $200,000. You have two options below:

Option A: Interest rate of 6% and $4000.00 in closing costs

Option B: Interest rate of 7% and $0.00 in closing costs.


Option A has a principal and interest payment of $1199.11 per month. Option B has a principal and interest payment of $1330.61 per month. Option A has a payment savings of $131.50 per month but has $4000.00 in closing costs.

Let's say you KNEW you were going to be moving in 12 months. Over 12 months, Option A will save you $1578.00 in interest payments v.s. Option B. However, it cost you $4000.00 in closing costs to get that 6% rate to make those savings. In reality, if you went with the lower rate and normal closing costs of $4000, it will have cost you $2422.00 more over the 12 month period v.s. taking Option B with no closing costs and the higher rate.

As a general rule, if you plan on keeping your loan for a short period of time, consider a no closing cost option. Over the long term, paying closing costs and obtaining a lower interest rate is a better option.

No Closing Cost Refinancing

No cost mortgage refinancing works on the same principal as outlined above. Over a shorter period of time, your interest rate savings with a no cost loan, although the rate is higher, will not be more beneficial than paying closing costs. However, over longer periods of time, it makes much more sense to pay your own closing costs and take a lower rate to benefit from the interest rate savings. A BeatMyBroker.com mortgage expert can provide clarity on the no closing cost loan debate should you have any questions.