No Cost Closing Cost Mortgage Loans
the Pros and Cons of a Mortgage with No Fees
When listening to the radio or watching TV, you will see lots of advertisements for no cost mortgage loans from banks, lenders and home loan brokers across the country. It makes sense to evaluate the no closing cost mortgage option before committing to a home loan.
Buying a home is the American Dream, but it comes with costs. One of those is closing costs. Any time you close a mortgage loan, you will need to pay 2-5% of the amount financed in closing costs.
If you have a loan of $200,000, your closing costs could be $10,000. That is a lot of money to fork out after you already have put together thousands for a down payment.
That is why no closing cost mortgage loans are becoming more and more popular. But is a no closing cost mortgage right for you? Consider the pro's and con's below so you can make the best decision. Getting a no closing cost mortgage may make more sense for some buyers and some purchases than others. Carefully consider the factors below.
Overview of No Closing Cost Mortgages
Closing costs include such services as loan origination, appraisal fees and title search and insurance premiums. The costs for these items will vary from state to state but you can bet you will pay several thousand dollars for these services.
No closing cost mortgage loans allow you to pay the closing costs of the loan in a different way. Instead of paying in cash up front, you can opt to wrap some of the closing costs into the loan. Or, you can pay a slightly higher interest rate and pay them over time.
The most obvious advantage of a no closing cost loan is that you do not have to pay for your closing costs up front after you had to pay for your down payment. Not having closing costs to pay when you buy your home makes getting into the home much easier for most people.
Because you do not have to pay closing costs at closing, this means that you will have more money available for things that you want to do to the home. Perhaps you will be able to pay for a kitchen renovation or something else you want to do on your new home.
Having no upfront closing costs also may be smart if you are doing a refinance or are getting a second mortgage. You may not pay as much in higher interest if you pay off the new loan early.
But paying closing costs at the closing table also has its advantages. If you add closing costs to the balance of the loan, you will pay a higher rate and you also will have a higher payment.
If you are having trouble paying your closing costs at closing, you can ask the seller to pay part of the closing costs. If this will not work, you also can offer to pay a higher purchase price. This will raise the cost of the loan but will save you money up front.
Pro's of a No Closing Cost Mortgage
Cons of a No Closing Cost Mortgage
There is no question that no closing cost loans have become more popular as homes are getting more expensive in the housing recovery of the last five years. By spreading out the costs of closing costs over time, you will spend less cash up front.
Certainly the "no cost refinance" has been effectively advertised over the last few years.
But people need to take a close look at whether it makes sense in their specific case to do a no closing cost loan or not. If you are going to live in the home for 10 years or more, you will probably pay a lot more for the no closing cost option.
Most experts generally would advise to pay the closing costs up front if you can reasonably afford to do so. You also can try to reduce the closing costs by shopping around at several title companies. It may turn out that some title companies charge a lower amount for some closing cost fees.
But if it comes down to being able to not buy the home if you have to pay closing costs, it could be that a no closing cost loan is the best choice for you.
No Cost Mortgage vs. Lowest Rate Home Loan
What is Better for You?
Getting a mortgage always has costs involved. Who ends up paying those costs and when will depend upon several factors:
One of the more popular choices today for some home buyers is to opt for a no closing cost mortgage. This allows you to at least not have to pay some closing costs out of pocket.
But should you opt for a no closing cost mortgage, or bite the bullet and pay them up front, so you can get the lowest rate home loan? This is an important decision that will have different answers for different people. Keep reading to learn how to make the call on this important matter in your situation.
How Much Are Closing Costs?
Closing costs on a mortgage loan will vary depending upon the type of loan, the state you are in, and even the county or city. The final dollar amount also will depend upon the value of the home and how much you are borrowing. As you would expect, a more expensive loan has higher closing costs.
The state you are in has a big impact on closing costs too. A recent mortgage study found that Ohio has the lowest closing costs overall, and Hawaii has the highest.
Whatever state you live in, your closing costs will consist of these expenses:
All told, closing costs can cost you from 2-5% of the total amount borrowed. It makes sense therefore that home buyers may consider a no closing cost mortgage.
How to Look at No Closing Cost Mortgages
There are several ways to set up a mortgage loan. To be able to accurately compare no-cost mortgage offers, you should be sure that every lender you are considering is covering the same things. For instance, the lender may cover the lender fees but not the prepaid expenses and third-party expenses. Or, the lender may handle all fees and third-party fees, but not the prepaids. Or, it may pay for everything, including loan costs and prepaids.
A lender that pays for all of your closing costs is going to charge you a higher mortgage interest rate. On the other hand, a lender who charges a lower rate is probably only covering its own closing cost fees, and not fees from the title company, appraiser and escrow company.
Remember that no lender is in business for free. They all make their money somehow. To pay for the closing costs on your loan, the lender is going to charge you a higher rate.
It is your decision whether it is worth it to you to have a no closing cost mortgage and therefore have a higher rate and monthly payment.
How to Get a No Closing Cost Loan
If you want to limit your out of pocket costs when you get your home loan, you can often work with your mortgage broker to lower your closing costs by having the lender cover some or all of them.
Mortgage brokers make their money by collecting what is called a yield spread premium or YSP, to work on your loan.
The end lender pays the fee to the mortgage broker for working on the loan. In other words, the YSP is the profit the mortgage broker gets.
By knowing this, you can ask your broker to use the YSP to set up a no closing cost mortgage for you.
For example, if the broker is getting paid a 1% YSP by the lender, he or she does not need to charge you an origination fee. In this situation, the YSP may be able to save you 1% of the amount of the loan so you pay that much less out of pocket.
A broker who receives a 2% YSP can cover more of your loan closing costs.
The rate and fee options may be something like this:
Which of these options are the best or worst? None of them. Borrowers just need to understand that lower rates will cost you more up front and higher rates will cost you less up front. Which is best for you depends upon how much money you want to put out at the loan closing.
Also, it is important to know how long you want to be in the home. Generally, if you intend to stay in the home for 10 years or longer, a no closing cost mortgage is going to cost you more over time than you would have paid in upfront closing costs.
If you are working with a mortgage banker, they do not get YSPs. But you still can ask them for no closing cost options with a higher rate.
Now a Good Time for No Closing Cost Loans
Sure, you pay a higher rate when you opt for a no closing cost loan. But rates in 2017 are very low. You may decide to have your lender pay all of your closing costs but you will still get a low rate.
You may be able to have the lender cover your closing costs and still get a low rate in the 4s.
The Bottom Line for No Cost Home Loans
A no closing cost mortgage can help you to get into your dream home by limiting your out of pocket costs, other than your down payment. But you should perform a careful analysis to decide if it is better for you to bite the bullet and pay the closing costs up front.