To a first-time home buyer, a no-closing-cost mortgage can sound like a less expensive way to buy a home. But the name is actually misleading. It doesn’t mean you won’t ever pay for closing costs. It just means you won’t have to pay them upfront along with your down payment. Instead, you’ll pay closing costs in likely one of two ways — via a higher mortgage rate or a higher principal loan balance.
Since a no-closing-cost mortgage isn’t quite what it sounds like, is this option a good idea financially? While it may make sense for home buyers in some scenarios, it often isn’t the best way to save money in the long run. In fact, by avoiding closing costs upfront, you’ll likely spend more money over the full loan term.
Here, we’ll go more into depth about what no-closing-cost mortgages are, what types of borrowers might benefit from them, and how to tell if this type of mortgage is a smart financial decision for your future.
What is a no-closing-cost mortgage — and is it really 'no cost'?
A no-closing-cost mortgage is a loan option that allows home buyers to forgo paying closing costs upfront. But a “no-closing-cost mortgage” doesn’t actually mean that you’ll avoid paying closing costs altogether.
“There is something we call a par rate, which is a middle rate that does not have any points on it or any rebate,” says Alex Olivera, broker and owner of Patriot Mortgage Group in Franklin, TN. “This rate is different based on the market…and based on the person’s qualifications.
“If you want a lower rate, you must pay points at closing as a tradeoff to get a lower rate. If you take a higher rate, you get rebate pricing (a credit toward the hard costs). The no closing cost loans essentially have you take a rate above par to offset the hard costs.”
But that higher rate you take in exchange for lender credits means your monthly mortgage payments will be higher. So, in reality, you’re still paying for closing costs — just not upfront and not in the same way as you would for a traditional loan.
How a no-closing-cost mortgage works
Every mortgage has closing costs. Typical closing costs total 2-5% of the full loan amount and can include things like an origination fee, attorney fees, appraisal fees, title fees and any prepaid items[1] like property taxes and insurance. A no-closing-cost mortgage works by deferring those costs — either through a higher interest rate or by adding the closing costs into your loan principal.
“This isn’t about avoiding costs,” says Matthew Oetting, executive loan officer at Best Interest Financial. “It’s about deciding whether to pay them upfront or over time.”
A lender may offer a closing cost credit in exchange for a higher interest rate
One of the ways a no-closing-cost mortgage works is that lenders will offer credits to cover closing costs but at the expense of a higher interest rate on your loan. A higher interest rate translates to higher monthly mortgage payments and more spent on interest over the life of the loan.
“The main trade off is the interest rate,” says Mark Cohen, founder and CEO of Cohen Financial Group in Beverly Hills, CA. “You’re effectively paying for those closing costs through a higher interest rate, which can cost a lot more over the life of the loan if you keep it long term.”
Here's a cost comparison between a traditional 30-year mortgage and a no-closing-cost option.
| No-closing-cost mortgage | Traditional conventional mortgage | |
|---|---|---|
| Home price | $330,000 | $330,000 |
| Down payment (10%) | $33,000 | $33,000 |
| Loan amount | $297,000 | $297,000 |
| Closing costs | $0 | $8,910 (3% of loan total) |
| Interest rate | 6.375 | 6.00 |
| Monthly mortgage payment (not including taxes and insurance) | $1,853 | $1,781 |
| Total spent on loan | $667,042 | $641,039 |
| Total interest paid on loan | $370,042 | $344,039 |
While you save $8,910 upfront by deferring closing costs, you’ll end up paying about $26,000 more in interest over the loan’s full 30-year term. So if you stay in your home until the payoff date or don’t refinance, you’re paying more overall with a no-closing-cost mortgage.
A lender may roll the closing costs into the loan
Instead of a higher interest rate, some lenders will roll the closing costs into the total loan balance. So, for example, if closing costs are $10,000 and the loan amount is $400,000, rolling closing costs into the loan total amounts to a new principal balance of $410,000.
Again, you’re still paying closing costs in this scenario, just over the entire loan term with interest accruing on that higher amount.
Of the two options, this route is often less favorable. On top of increasing the principal loan amount and interest paid, it reduces the portion of your home you own outright — also known as your home equity. This could put you at risk of being underwater on your mortgage if home values tank early on in your payoff schedule, which means you owe more than your home’s worth.
If you make a down payment below 20%, this method could also prolong your private mortgage insurance (PMI) payments.
Let’s compare costs for this approach, rolling the closing costs into the principal balance.
| No-closing-cost mortgage | Traditional conventional mortgage | |
|---|---|---|
| Home price | $330,000 | $330,000 |
| Down payment (10%) | $33,000 | $33,000 |
| Loan amount | $305,910 | $297,000 |
| Closing costs | $0 | $8,910 (3% of loan total) |
| Interest rate | 6.00 | 6.00 |
| Monthly mortgage payment (not including taxes and insurance) | $1,834 | $1,781 |
| Total spent on loan | $660,271 | $641,039 |
| Total interest paid on loan | $354,361 | $344,039 |
Just like in the first example, you’ll pay more in interest — just over $10,000 more — by rolling the closing costs into the loan balance.
Why you'll still need to bring some money to the closing table
Just because you get a no-closing-cost mortgage doesn’t mean you can come empty-handed to the closing table.
“The structure of the [no-closing-cost] mortgage can lower your cash to close, but it doesn’t make appraisal fees, title charges, or taxes disappear,” says Oetting. “It just changes how and when you pay them.”
Borrowers can typically apply lender credits toward true closing costs, such as:
- Origination, underwriting, and processing fees
- Appraisal fee
- Credit report fee
- Title and settlement fees
- Recording fees
But lender credits can’t go toward all the expenses associated with buying a house. Along with a down payment (if required by your loan type), you’ll still cover certain escrow and prepaid expenses upfront. The include:
- Property taxes through the end of the year
- Homeowners insurance
- Prepaid interest
- Initial escrow deposits to set up your account
“A borrower might have $10,000 in closing costs and $8,000 in prepaids,” says Oetting. “A lender credit can offset the $10,000 in costs and significantly reduce cash to close, but it does not eliminate the third-party expenses themselves.”
Lenders must provide borrowers with a closing disclosure at least three business days before closing.[2] This document lists closing costs and cash to close, breaking down what’s covered by lender credits and what the borrower will need to pay on closing day.
Calculating your breakeven point on a no-closing-cost mortgage
The main tradeoff with a no-closing-cost mortgage is that while you’ll pay less upfront, you’ll pay more each month via the extra interest added to your mortgage payments. At some point in your loan’s amortization, the accumulated extra interest will start to exceed the amount you would have paid in closing costs upfront. This is called your breakeven point.
Here’s a quick calculation to determine the breakeven point between a traditional and no closing cost mortgage.
Total closing costs covered ÷ monthly payment difference = Breakeven point in months
Let’s look at an example.
Say you’re getting a 30-year mortgage worth $400,000, and closing costs come to 3% of the loan amount, or $12,000. If you pay those closing costs upfront and get a traditional mortgage at 6.5% interest, your monthly principal and interest payment would be $2,528. If you go the no-closing-cost loan route, the lender raises the interest rate to 6.875%, and your monthly payment would become $2,628.
Our calculation would be:
$12,000 ÷ $100 = 120 months to breakeven point
Using this example, you might notice that around the 10-year mark in the loan term, the difference in costs between a traditional and no-closing-cost loan equals $0. This is the breakeven point.
| Years lapsed | Total paid for traditional mortgage with closing costs | Total paid for no-closing-cost mortgage | Difference |
|---|---|---|---|
| 1 | $42,336 | $31,536 | -$10,800 |
| 5 | $163,680 | $157,680 | -$6,000 |
| 10 | $315,360 | $315,360 | $0 |
| 20 | $618,720 | $630,720 | $12,000 |
| 30 | $922,080 | $946,080 | $24,000 |
“If you stay in the home for 30 years and never refinance, then it was definitely not a good decision because over time that rate difference will add up significantly,” says Olivera.
However, if you expect to move or refinance before the breakeven point, you could potentially save money on the no-closing-cost loan. You'll also have more of a cushion for home repairs, moving costs, and emergencies.
Is a no-closing-cost mortgage a good idea?
There are some scenarios when a no-closing-cost mortgage for a home purchase can make sense:
- Your budget is tight: In this scenario, you don’t have the capital to pay closing costs and every dollar matters. You might need to use what extra funds you have to save toward reserves, home repairs or renovations, or moving costs. ”A no-closing-cost mortgage makes sense when liquidity matters more than securing the absolute lowest rate,” says Oetting.
- You’re buying a starter home: In this scenario, you’re not buying the forever home. It’s a place you’ll stay for around 5-7 years (or before reaching your breakeven point) so you don’t incur a penalty for taking a higher interest rate on your no-closing-cost loan.
- You plan to refinance: Alternatively, instead of planning to sell your starter home in a few years, you might plan to stay in your home and refinance your loan in 5-7 years instead. In this scenario, you get a brand new loan with a new interest rate. The only catch? Refinancing will only make sense if mortgage rates are lower and not higher, otherwise, you’d end up paying even more in interest.
- You want to preserve your emergency fund: You never know when you might need emergency savings. This a cautious scenario — you would rather maintain a healthy emergency fund instead of draining your savings to close the deal.
That said, there are other scenarios when you might want to pass on this type of mortgage and pay closing costs upfront:
- You’re planning to put down long-term roots: If you’re planning to stay in the home long term, a no-closing-cost loan is probably not the best idea. “Borrowers need to compare the upfront savings against the higher monthly payment and total interest paid over time,” says Cohen.
- You’re already pushing your budget: In this scenario, you’re buying a home at the top end of your budget, bringing with it a high monthly mortgage payment. Taking a higher interest rate in lieu of paying closing costs can add unnecessary financial strain to your monthly expenses.
- You’re unsure of your selling timeline: If your plans to sell or move within a few years of buying is dependent on home values, the status of the housing market, or your housing needs, tread cautiously. Make sure you have an alternate plan if it doesn’t make sense to sell or refinance when you reach your breakeven point.
How to get a no-closing-cost mortgage
The process to get a no-closing-cost mortgage is similar to that for a traditional mortgage. You’ll still need to shop around with multiple lenders, undergo a hard credit check, and provide financial documentation to show you meet mortgage requirements. But there are a few extra steps you should take to ensure that the no-cost route is the best for you financially:
- Plan out your needs: Are you buying a starter home or a long-term house? Do you have just enough savings for a down payment? Could your monthly budget take a higher mortgage payment comfortably? These are all questions you should ask yourself before discussing options with a loan officer.
- Compare loan estimates: Ask your lender for a loan estimate at the par rate to reflect the real borrowing costs without any points or credits to buy down your rate or lower upfront costs. Then, ask for a breakdown of the no closing cost option, and one where you pay additional points upfront to buy down your rate. That way, you can compare the costs side by side with real numbers.
- Identify what lender credits cover: Not all lenders offer credits for the same things. Get a handle on this coverage before deciding to apply with a lender.
- Calculate your breakeven point: How long can you stay in the home before the no-cost option becomes more expensive? Crunch these numbers and weigh whether it matches your current housing and financial needs.
- Ask how the no-closing-cost option works: Will the lender offer a credit in exchange for a higher interest rate or roll the costs into the total loan balance? Knowing which method the lender does can help you better compare costs and decide.
- Shop around: Request loan estimates from at least three lenders before applying for a mortgage. This can help you judge whether a particular lender charges higher fees or if another offers more credits.
Other ways to lower your closing costs
A no-closing-cost mortgage isn’t right for everyone. Luckily, there are other ways to lower your closing costs:
- Negotiate lender fees: Some lender fees, such as origination fees, are negotiable. What’s more, if you find a lender that will waive or lower certain fees, you can use that as a negotiating tool with other lenders.
- Consider seller concessions: This method typically only works well if you’re in a buyer’s market, but you can try asking the seller if they’re willing to cover all or a portion of your closing costs.
- Explore down payment and closing cost assistance programs: Your state or local housing agency may offer assistance in the form of grants or low-interest loan programs for eligible first-time and repeat home buyers. A HUD-approved housing counselor can also show you what’s available.
- Roll part of the closing costs into the loan: If you can find a lender that offers to roll a portion of the closing costs into the loan balance — while you pay the remainder upfront — then your rate premium won’t be as high as it would be with a no-cost loan.
Connect with a loan officer to make a plan
Whether you’re thinking of applying for a mortgage today or in a few months, talking to a loan officer now can help. An experienced loan officer can look at your current financial profile and advise you on your mortgage options.
At Best Interest Financial, we provide personalized, white-glove service that big-box and automated lenders can’t. With over 80 years of combined experience and billions in closed loans, our loan officers have the expertise to help identify creative financing possibilities that others miss.
No matter what your timeline is, we can help you develop a strategy to reach your goals and get you on the path to home ownership. Get a free, 60-second quote from Best Interest today to learn more.
FAQs
What if I can't afford closing costs?
If you have just enough savings to cover the down payment on your home and paying for closing costs would leave you too strapped for cash, you can explore a no-closing-cost mortgage. But, this type of mortgage isn’t actually “no cost.” You’ll still pay for closing costs — typically through a higher interest rate.
Can you refinance a mortgage with no closing costs?
Yes, just like you can get a purchase mortgage with no closing costs, you can refinance without closing costs.
Can you roll closing costs into a mortgage?
Yes, you can roll closing costs into a mortgage. But doing so increases your total mortgage amount, which means you’ll have a higher monthly payment. You’ll also start out with less home equity with this option, meaning you may need to pay private mortgage insurance for longer.
What are rates on a no-closing-cost mortgage?
Rates on a no-closing-cost mortgage vary by lender and a borrower’s financial profile. Since lenders often raise the rate on no-closing-cost loans to compensate for credits that reduce the upfront cost, you could expect a rate slightly higher than the average fixed rate.
Disclaimer: The information provided in this article is for informational and educational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Mortgage rates, terms, products, and eligibility requirements are subject to change without notice and vary based on individual circumstances, credit profile, property type, loan amount, and other factors. All loans are subject to credit approval. This content does not constitute a commitment to lend or an offer of specific loan terms. For personalized mortgage advice and to discuss loan products that may be suitable for your situation, please contact one of our licensed loan officers.
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