Is a No Closing Cost Mortgage for You? (2024)

Buying a no closing cost mortgage isn’t necessarily a bad thing – as long as you understand how you’ll be paying those costs. To start with, a no closing cost mortgage doesn’t mean you won’t pay the costs associated with taking out the loan. When you take out a mortgage, there are costs that need to be paid. These vary but typically include: origination fees, credit checks, appraisals, title searches, mortgage broker commissions, escrow services, referral fees, and others.

At closing, you’ll be expected to pay out of pocket for the down payment plus these fees. Your actual costs will vary but these can total between 2% up to 5% of the loan amount. On a $200,000 mortgage, the total can be between $4,000 (at 2%) and $10,000 (at 5%). That’s a substantial amount when you’ve already been putting away the dollars for a few years to save the down payment. It can literally make or break your ability to close the deal.

There’s No Free Lunch

When you elect to go with a no closing cost mortgage, the costs are recovered by charging you a higher interest rate. It’s not unlike paying points to buy down the interest rate – only in reverse, you pay a higher rate to save closing costs.

Of course, a higher interest rate means a higher monthly payment. That higher monthly payment is your key to figuring out if paying closing costs or paying a higher interest rate is the better deal for you as a consumer.

When a No Closing Cost Mortgage Works for You

A good tool for you to use to figure out your better option is a good mortgage calculator (there are many versions available online). A good calculator shows you the accumulative interest paid over time. You need to compare two calculations. You need to first know the total closing costs that you won’t have to pay (for example $4,000 at 2%). Find the point on the higher interest rate amortization schedule when you’ll have paid the $4,000 in higher interest compared to the lower interest amortization schedule. Start at around year 5. This is the point in time when the no closing cost loan begins costing you more in interest than the lower rate.

Now consider if you believe you’ll still own the home at that point in time. If you sell before the no closing cost loan reaches this point, you’ll be saving money. If you still plan to own the home, you’ll be paying more money in the long term.

Another consideration is if you think interest rates will go lower in the future and you might refinance your mortgage before this point in time. However, more variables come into a refinance consideration. When refinancing, you no longer need to be concerned with making a down payment plus you’ll have built more equity. That means you’ll be refinancing a smaller amount, which equates to less in closing costs for the refinance. Likely, you’ll be able to wrap the refinance closing costs into the new loan at a lower interest rate. Refinancing before the no closing cost mortgage begins costing you more money is often your best deal.

Also to be considered are the “time value of money” and “opportunity costs”. The time value of money is about what a dollar in your pocket today would be worth at a future date (inflation). Opportunity cost is about other opportunities you forego by spending your cash to pay closing costs today. Not paying closing costs but paying a higher interest rate might make the difference whether you can even buy the house today. Another opportunity might be using that money to make improvements on the home you buy today.

When Paying Closing Costs is Your Better Choice

It can be painful paying those closing costs up front but it could be the frugal thing to do in the long run. If you plan to stay in the house past the breakeven point, it will cost you less over the length of the loan. You’ll also have a smaller monthly payment that could make it easier to deal with other financial surprises that are certain to come up in the future.

Consider paying the closing costs up front when interest rates are low right now and you expect them to go up in the future. Also when you plan to keep the loan for many years and you can afford to buy the cheapest rate available. There are also income tax implications. Some closing costs are tax write-offs. If you pay them today, you’ll be able to write them off against current income. If you go with the higher interest rate, you’ll be able to write them off over time as interest paid for your primary residence.

These calculations aren’t simple. They require making assumptions about what will happen in the future. However, scrutinizing the numbers enables you to make an educated guess as to what is best for your financial future.

Please leave a comment if this article was helpful or if you have a question.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 35 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite directio