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. 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.

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,” but that’s a mouthful.

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 Much Are Closing Costs On A House? 

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.

What Is Included In Closing Costs?

Closing costs generally include some of the following fees and taxes. The fees you’re charged will depend on your loan type and whether or not 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

Can You Roll Closing Costs Into Your Mortgage?

Yes! 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 for you, and often will add the amount to your loan amount. You’ll pay down your closing costs as you make your mortgage payments.

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

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

• You won’t have to pay as much upfront. That 3% – 6% can add up!
• You may be able to make a larger down payment.
• You pay less money out of pocket, which can help you avoid dipping into savings or other funds

Some cons of no-closing-cost mortgages:

• Your interest rate will be higher, so the costs may add up to more than the original closing costs.
• Your monthly payment will likely be higher, in order to cover those closing costs.
• Your lender may require a higher credit score and more stringent employment history to qualify.

Who Offers No-Closing-Cost Mortgages?

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

What If You Can’t Afford Closing Costs?

If you can’t afford to pay closing costs upfront, you have some options:

• Apply for a no-closing-cost mortgage.
• Get some closing costs waived in unique situations.
• Make a smaller down payment.
• Negotiate closing costs with the seller (especially if it’s a buyer’s market); they may 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. If you do end up paying closing costs, you can always refinance down the line, to lower your interest rate or change your monthly payment. However, keep in mind there are also closing costs associated with a refinance.

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. Consider getting approved with Rocket Mortgage to determine what you can afford and whether a no-closing-cost mortgage is right for you.