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What is a No Closing Cost Mortgage and How to Get One
No closing cost mortgages are mortgages where the home buyer pays none of their assigned closing costs. Instead, the mortgage lender pays closing costs on the buyer’s behalf.
No closing cost mortgages are sometimes called “zero-closing cost mortgages” or “no fee mortgages” – all of which are misnomers because there’s no such thing as a home purchase with no closing costs.
No closing cost mortgages are ideal for two home buyer types:
- Buyers with limited funds for making a down payment
- Buyers who prefer to save cash for furniture, home repairs, and other uses
Zero-cost loans are also a fit for home buyers who earn a decent income but have yet to have time to build up their savings.
This article discusses mortgage fees, how no closing cost mortgages work, and when home buyers should consider no-cost mortgages to help purchase their home.
How Do No Closing Cost Mortgages Work?
The term “no closing cost mortgage” is a misnomer because purchasing a home and financing with a mortgage carries costs.
Some fees are assessed on every loan, such as government taxes and recording fees. Some fees are not always charged, including loan origination fees and mortgage discount points.
The better name for a no closing cost mortgage would be “lender-paid closing cost mortgage” because the latter reflects how no closing cost loans work.
A no closing cost loan is when the lender pays the buyer’s costs on their behalf.
In exchange for paying the buyer’s closing costs, mortgage lenders charge the buyer a higher mortgage interest to offset its initial cash outlay.
The trade-off between closing costs and interest rates fluctuates with market conditions.
At today’s mortgage rates, the no-cost mortgage option adds $35 per month to a mortgage payment with a $200,000 mortgage.
Buyers can request rebates up to their total closing cost figure. Lenders will only rebate the total fees charged.
Generally, lenders will trade one percent in closing costs for a 25 basis point (0.25 percentage point) increase in mortgage rate.
How Much Are Closing Costs To Buy A Home?
According to CoreLogic’s ClosingCorp, closing costs to purchase a home average 1.01 percent of the home’s purchase price, or $1,001 per $100,000 purchased.
Closing costs include:
- Lender services
- Title company services
- Settlement services
Home buyers also pay real estate taxes to state and local governments, adding up to an additional three percent in fees.
We’ve listed the ten most common mortgage closing costs below. Your purchase may charge some or all of these fees, plus additional fees not shown below.
1. Origination fee
Origination fees are fees charged by a mortgage lender for originating, processing, and approving your loan. Not all lenders charge origination fees, which are typically less than 1 percent of the mortgage loan amount.
2. Appraisal fee
Appraisals are estimates of a home’s value performed by a licensed professional. Appraisal fees range from $300 to $700, depending on the size and uniqueness of your home. Some lenders use software to appraise homes which can reduce costs by 50% or more.
3. Credit report fee
Mortgage applications require credit reports for approval. Credit report fees range between $30 to $70.
4. Title search and title insurance fee
Title searches ensure that sellers have legal standing to sell their home and that mortgages and claims to the home are satisfied. Title search fees range up to $300. Title insurance is an additional fee that ensures against errors and can add up to $1,000 in costs on purchasing a $200,000 home.
5. Settlement or escrow fee
Settlement fees are the cost of preparing and processing home purchase documents. Settlement fees are often less than $1,000.
6. Recording fees
Recording fees are the cost of recording the home purchase with your local municipality. Recording fees vary based on the purchase price and county of record. Recording fees are at most $200.
7. Survey fee
Surveys are detailed maps produced by licensed professionals that illustrate precise property boundaries and structures on the premises. Survey fees range up to $1,000. Not all home purchases require surveys.
8. Home inspection fee
A home inspection examines the home’s mechanical, plumbing, and fixed system, performed by a licensed professional. Home inspection fees are often less than $500. Home inspections are optional and recommended.
9. Pest inspection fee
A pest inspection examines the home for termites and other pests performed by a licensed professional. Pest inspection fees range up to $300. Pest inspection may be optional.
10. Flood certification fee
Flood certification is obtaining and reviewing flood zone information for a home and determining whether flood insurance is required. Flood certification fees range up to $50.
Note that closing costs are not a profit center for mortgage companies. Buyers pay exact fees with no additional markup.
The Advantages Of No Closing Cost Mortgages
According to the Center for Responsible Lending, without getting a cash gift for a down payment or using down payment assistance, the typical first-time home buyer needs eight years to save for a minimal down payment and closing costs.
Eight years is too long to wait for a lot of first-time buyers.
No closing cost mortgages make homeownership more affordable and attainable.
You can buy a home today instead of saving for multiple years
A Fannie Mae working paper shows that some home buyers pay more in closing costs than for a downpayment, doubling the time needed to save for a home.
Through zero-closing cost mortgages, home buyers can purchase a home today instead of waiting to achieve their American Dream.
You can leave more money in the bank
According to the National Association of Homebuilders, the typical new homeowner spends more than $21,000 within their first 12 months on furniture, repairs, and new appliances. Life emergencies happen, too.
Buyers who use no closing cost mortgages are often more cash-ready than buyers who spend everything they have on down payment and fees.
You can “beat the bank” and save more money
A zero-closing mortgage breaks even when payments from the higher interest rate of a no closing cost mortgage exceed the savings made at closing. The break-even point for many no-cost loans occurs in Year 5.
Therefore, if you plan to move or refinance your mortgage within the first five years in the home, a zero-closing cost mortgage will often save you money.
You can maximize your down payment
With a no closing cost mortgage, buyers have more free cash to use for a down payment. Larger down payments can open access to lower mortgage rates with a conventional loan, and more favorable loan terms for jumbo and portfolio products. A larger down payment may also strengthen eligibility for buyers with a high debt-to-income ratio.
No Closing Cost Mortgage Alternatives
There are three alternatives to using a no closing cost mortgage, seller concessions, first-time home buyer grants, and down payment assistance.
Seller concessions are a form of financial incentive sellers give home buyers to make homes more affordable. The most common seller concession is when a seller pays some or all of a buyer’s closing costs from its proceeds.
Eligible costs for seller concessions include:
- Origination fees and discount points
- Title fees and settlement costs
- State and local real estate taxes
Home buyers can receive up to 6 percent of a home’s purchase price in the form of seller concessions, or $6,000 per $100,000 in the purchase price.
If you expect to use seller concessions, follow these rules:
- The purchase sales contract must reference the seller concessions
- The settlement statement must itemize the seller concessions
- The value of seller concessions may not exceed the transaction’s total closing costs
Seller concessions require mortgage lender approval. If you plan to use seller concessions with your upcoming purchase, notify your lender.
First-Time Home Buyer Grants
First-time home buyer grants are financial assistance programs that give first-time buyers cash to help make homes more affordable. For eligible buyers, cash grants can range up to $50,000 and provide support for closing costs, down payments, home repairs, and other home-buying expenses.
There are three cash grant bills with Congress, including the Downpayment Toward Equity Act which gives up to $25,000 cash to first-time home buyers. The bill has yet to pass into law.
See all first-time home buyer grants.
Local Down Payment Assistance Programs
Local down payment assistance programs help eligible low- and moderate-income first-time buyers afford the upfront costs of buying a home. Down payment assistance programs provide cash grants, forgivable loans, and closing cost assistance to first-time home buyers.
The Department of Housing & Urban Development maintains a periodically-updated list of downpayment assistance programs on its website. Check with your local provider before applying because programs may be inactive or out of funds.
No Closing Cost Mortgage FAQ
How do I get a no closing cost mortgage?
Your lender will likely provide you with a no closing cost option anyway. If you don’t receive one, ask for it.
Is it a zero-closing cost mortgage when my lender rolls closing costs into my loan?
No, zero closing cost loans are when a lender pays closing costs on behalf of the buyer. When a buyer rolls their closing costs into a mortgage, the buyer is still paying their fees.
What are the drawbacks to a no closing cost mortgage?
Buyers who use no closing cost mortgages receive higher mortgage interest rates than buyers who pay closing costs with cash.
How are mortgage lenders able to offer no closing cost mortgages?
Lenders don’t earn less profit on a no-fee mortgage. They assign higher interest rates to buyers to collect more interest over the loan’s life and offset their initial cash deficit.
Are the terms of a no closing cost mortgage the same as a standard mortgage?
Yes, no closing cost mortgages are structured identically to other mortgages. Buyers can choose loan length, loan size, and whether the interest rate is fixed-rate or adjustable-rate. The characteristic that makes a no closing cost mortgage unique is that the lender pays the closing costs instead of the buyer.
How can I compare the closing costs of a no closing cost mortgage to a standard mortgage?
The closing costs for a no closing cost mortgage are the same as with a standard mortgage loan. The difference between no-cost and full-cost loans is in which party pays for costs. In a no-cost scenario, the lender pays the fees. In a full-cost scenario, the buyer pays.
Are no closing cost mortgages available for all types of loans (e.g., FHA, VA, conventional)?
Yes, buyers can use the no closing cost option for all loan types, including conventional, FHA, VA, and USDA.
Are no closing cost mortgages free?
No, no closing cost mortgages are not free. No closing cost mortgages carry the exact closing costs as other loans. The difference between a no closing cost loan and other loans is that, with a no closing cost loan, the lender pays costs on behalf of the buyer. In exchange, the buyer receives a higher mortgage interest rate.
Can I get a no closing cost mortgage with a low down payment?
Yes, the no closing cost option is available for all mortgage loans and loan types, including low-down payment mortgages.
Will a no closing cost mortgage have a higher interest rate?
Yes, no closing cost mortgages come with a higher interest rate than buyer-paid closing cost mortgages. Higher interest rates compensate a mortgage lender for paying buyer costs.
Can I get a no closing cost mortgage with a low credit score?
Yes, the no closing cost option is available to buyers with all credit scores for all loan types.