No-Closing-Cost Mortgage: How To Decide If It’s Right For You
A no-closing-cost mortgage can be a lifesaver if you’re short on cash to buy or refinance a house. Instead of draining your bank account to pay thousands of dollars in mortgage fees, the lender pays them by charging you a higher interest rate or increasing your loan amount.
The catch? You’ll save money upfront, but pay more interest charges over the life of your loan.
What is a no-closing-cost mortgage?
A no-closing-cost mortgage allows you to roll your closing costs into your home loan instead of paying them when you finalize your home purchase. Your lender agrees to cover your mortgage fees at closing if you accept a higher interest rate or larger loan amount.
This is good news for homebuyers who can’t afford to spend tens of thousands of dollars on closing costs on top of making a down payment.
→ The bottom line: A no-closing-cost mortgage gives you short-term cash savings in exchange for a more expensive loan.
How much are mortgage closing costs?
On average, you’ll pay between 2% and 6% of your loan amount toward mortgage closing costs. The amount varies based on how much you borrow. The higher the loan amount, the more cash you’ll need to bring to the closing table.
Not all lenders treat no-closing-cost mortgages the same
Ask your lender whether they cover origination charges, like application and underwriting fees, as well as third-party costs. These expenses often include title and settlement costs or attorney fees, and can be found on Page 2 of your loan estimate.
Prepaid costs at closing, like mortgage insurance or homeowners insurance, may be treated differently, which is why it’s important to verify which fees your lender includes in a no-cost loan option.
How do no-closing-cost mortgages work?
There are generally two ways a no-closing-cost mortgage works:
- Your lender pays the closing costs but charges you a higher interest rate. This is the opposite of paying for mortgage points to get a lower rate — instead, you accept a higher rate in exchange for a lender credit that’s applied to your costs.
- You finance the closing costs by borrowing more. When lenders “roll costs into a loan,” they’re generally referring to increasing your loan amount and using the extra funds to pay your closing costs. This gives you a higher monthly payment but saves the cash you would’ve used for closing costs.
There are some fees specific to government-backed loans that are routinely rolled into a purchase loan, regardless of whether you opt for a no-closing cost mortgage. These include:
- Upfront FHA mortgage insurance premiums. The Federal Housing Administration (FHA) charges an upfront lump-sum fee of 1.75% of your loan amount when you buy a home with an FHA loan. This type of FHA mortgage insurance is typically added to your loan amount.
- VA funding fees. Military borrowers eligible for a loan backed by the U.S. Department of Veterans Affairs (VA) usually pay a VA funding fee ranging from 2.30% to 3.60% of their loan amount. The fee is collected to offset the taxpayer costs of the VA loan program.
- USDA guarantee fees. Low-income borrowers in rural parts of the country typically pay an upfront guarantee fee, worth 1% of their loan amount, to the U.S. Department of Agriculture (USDA). This fee protects lenders against potential mortgage default.
How to get a no-closing-cost mortgage
The mortgage process for a no-closing-cost loan is the same as a regular mortgage. Because your mortgage payment is higher, you’ll need to show more income or less debt to qualify.
Request a mortgage rate lock once you’ve chosen the best no-cost lender. Keep track of the expiration date to make sure you’re not stuck paying costly extension or relock fees.
How to lower your closing costs
Here are a couple of other ways to reduce your closing cost bill:
→ Find a first-time homebuyer program. Many cities and states offer first-time homebuyer programs that include grants or other assistance for your down payment and closing costs. These can take the form of a no-interest loan or a forgivable loan. Be sure to read the fine print: Many of these programs have income limits and occupancy requirements.
→ Ask the seller to cover the closing costs. Usually, the buyer pays closing costs, but you can negotiate with the home seller to pay some or all of them. Seller-paid closing costs are known as “seller concessions.” Your real estate agent should work with you to determine the best haggling strategy.
Pros and cons of a no-closing-cost mortgage
| Pros | Cons |
|---|---|
| You’ll leave more money in the bank. This is especially important if you’re a first-time homebuyer. All of the expenses — from maintenance to improvements to repairs — are your financial responsibility. A rainy-day cash stash will give you the financial cushion you need to pay for the unexpected. | You’ll pay more in interest. A higher loan amount or mortgage rate means you’ll pay more in interest charges during your loan’s term. That could add up to tens of thousands of dollars over the life of a 30-year mortgage. |
| You could use the extra cash for a bigger down payment. The more money you put down, the less you borrow. A smaller loan amount equals a lower monthly mortgage payment. An added bonus: You might avoid paying private mortgage insurance (PMI) if a no-closing-cost mortgage frees up enough cash for you to make a 20% down payment on a conventional loan. | You’ll have a larger mortgage payment. The higher monthly payment affects your debt-to-income (DTI) ratio, which measures the percentage of your paycheck committed to debt. If it’s too high, you might need to reduce your desired home price range. |
| You can buy a home sooner. It could take years to save up the cash you'll need to fully cover your closing costs and down payment. A no-cost loan can speed up your homebuying timeline and get you into your dream home sooner than you expected. | You’ll make less when it's time to sell. If you roll your mortgage costs into a larger loan amount, you’ll make less profit when you sell your home. If you plan to sell soon, you’re better off choosing a higher interest rate to avoid shrinking your home’s equity. |
Who offers a no-closing-cost mortgage?
Most lenders offer a no-closing-cost mortgage option. If you’re considering one, let your loan officer know. Lenders often quote the lowest available rate online, so there’s a good chance you’ll need to specifically request a no-cost option if it’s not advertised.
No-closing-cost loans are most common if you’re buying or financing a primary, single-family residence. Expect to pay full closing costs if you’re financing a second home, investment property or multifamily property.
Learn more about our picks for the best mortgage lenders.
How to get closing costs waived
If you’re willing to haggle, your lender may agree to reduce or get rid of some of your closing fees. Follow these four tips to get some of your fees waived:
1. Start by shopping for lenders
LendingTree research shows that borrowers who shop consistently save thousands — and even tens of thousands of dollars — when they compare mortgage costs and rates. Collect loan estimates from at least three to five lenders, then start negotiating.
2. Ask for junk fee waivers first
Upfront application fees, underwriting fees and processing fees are all negotiable. If a low-rate lender charges these fees but a higher-rate lender doesn’t, ask the lower-rate lender to waive or reduce the fees.
3. Check for first-time homebuyer specials
Lenders may offer to waive your appraisal fee or reimburse you for it at closing. Others may extend a flat-fee credit toward your costs.
4. Talk to your local bank
If you’re happy with the services and products at your neighborhood bank or credit union, ask them if they offer any incentives for automatic payments from your checking account or other homebuying discounts.
Frequently asked questions
Yes, as long as the higher loan amount doesn’t exceed your lender’s maximum loan-to-value (LTV) ratio. If it does, you’d have to accept a higher interest rate — rather than increasing your loan amount — when getting a no-closing-cost mortgage as a homebuyer.
In this situation, you can either cover the costs or move on to another house. Your real estate agent should advise you on whether the seller is likely to pay costs based on your offer price. Generally, a seller is more likely to consider paying closing costs if you make a full-price offer versus a low offer.
No-closing-cost options are available on most standard loan programs including conventional, FHA and VA loans.
Yes, if your lender offers the option.
A home is usually the most expensive asset you’ll purchase. Since most closing costs are based on a percentage of the mortgage you borrow to buy a home, they’re typically very expensive. As home prices rise, so do closing costs.
Yes, if you have the extra cash to do so and plan to stay in your home long enough to recoup them. If you have temporary residency plans, skip the out-of-pocket costs and consider a no-closing-cost loan.