Save Extra Upfront Expenses No-Closing-Cost Mortgages - HAR.com (2024)

Usually, there are homebuyers who want to initially save money, even if it means paying more afterward. Are you one of them? Then you must be having a hard time as most lenders would want the conventional upfront expenses like closing costs and down payment.

But not all mortgage loans have the same requirement. There is a mortgage where you can significantly cut down on the upfront expenses, no closing cost home loans.

What is No Closing Cost Loan?

The already high investment at the start of the home buying, the closing cost home loan saves you a lot of money. Instead of charging the closing cost at the start, the lender merges this expense with the monthly mortgage.

So, despite the ideas you may get by reading the name, there will not be any discount. The no-closing cost loan helps you delay the closing payment with your monthly mortgages. If anything, you will end up paying more as compared to a traditional mortgage, which we will talk about.

Why Are No Closing Cost Home Loans Important?

If you are new to real estate investments, the question that can be bothering you is, “Why is closing cost important?”

The closing cost is generally 1% to 4% of your total loan amount. This cost covers a variety of expenses like

• Home inspection fees
• Appraisal fees
• Title Insurance fees
• Application fees
• Processing fees

How Does the No Closing Cost Work?

The happiness of not paying the closing cost at the start of buying a home might be short-lived when you realize you cannot avoid it. Even if you didn’t pay the closing at the start, you would need to pay it down the line.

Here is an example of what no closing cost home loans are like.

Imagine you want to buy a home worth $400,000. After you take a loan to finance the property, there is a 3% closing cost, which is $12,000.

In the traditional mortgage loan, the $12,000 will be paid upfront, along with the down payment and other expenses.

But when you opt for the no closing cost loans, the lenders will not charge any closing cost at the start. Instead, they will raise the interest rates on your mortgage to cover the closing cost.

So, if your lender is offering you an interest rate of 4% with the traditional loans, it may rise to 4.5% with the no-closing cost loans. This allows the lender to recover the closing cost expense throughout the loan period.

When to Go for No Closing Cost Loans

When you step into the real estate industry and get tons of mortgage options, it can be hard to put a finger on which one to go for. That is when you need to adopt the horses for course approach.

There are specific situations where choosing a no-closing-cost loan is the right decision. Here are some of them.

Funds Available Later

If you don’t have enough money initially to pay off the closing cost, but you know your fortunes are about to change. You are waiting for something like your investment to bring you high returns or a job promotion to boost your salary.

Short Term Stay

As we have mentioned earlier, not paying the closing is not an option. If you go for the no-closing cost home loan, the lender will increase the interest rate on your monthly mortgage payments.

Now, if you plan on living for a limited period in your new home, your total interest won’t be as high as it will be if you live for a long time. So, the no closing cost loans can save you a lot of interest rate if you plan to relocate after a short period.

Can’t Wait to Get into a New Home

You might find yourself in a situation where you need to switch your home location soon. This can be a different job opportunity, your kid’s school being changed, or other factors. It might be difficult to gather finances in such a short time and pay the closing cost.

That is where you can delay the cost to pay alongside your monthly mortgage with no closing cost loans. You will not have to miss an employment opportunity or your kid going to a better school just because the commute is difficult.

Pros and Cons of No Closing Cost Loans

Now that you understand what the no closing cost loans can do, it is time to talk about the benefits you can enjoy and the downsides that you would want to know.

Advantages of No Closing Cost Home Loan

Initial Savings

Paying the 2% or the lender’s closing cost can eat up a large chunk of your savings. That is what you can avoid with no closing cost home loans and significantly decrease your upfront cost.

Make a Higher Down Payment

If you had a budget for the closing cost and you are wondering where to use that money, how about paying a higher down payment? This can help you buy higher home equity than you were initially planning.

And that is not all. Paying a 20% down payment can also help you avoid the expense of private mortgage insurance.

Save Interest Rate Money

No closing cost home loans and people living in their homes for a short period is a match made in heaven. If you are planning on doing the same, you save a lot of your money, which you would have paid in interest throughout the loan period.

That is why no-closing cost home loans usually have an extended repayment period.

Disadvantages of No Closing Cost Home Loan

Higher Interest Rate

The no-closing cost home loan usually has a higher interest since the lender has to recover the closing cost.

Increase Monthly Payments

Contrary to what you might think, the interest rate of no closing cost loans remains the same throughout the loan period. So, even if the lender has covered the closing cost, the interest rate will not decrease.

That means you will pay more than you have to during the repayment period than you would for a conventional loan.

Prepayment Penalty

The lender takes a risk when offering a no-closing cost loan and would want the return for it. That is why the lender might not appreciate your attempt to pay off your loan early and decrease the total interest rate. It might also result in a penalty.

The Bottom Line

The no-closing-cost loan can be a good option if you want to save money early. You now know how it works, along with its benefits and downsides.

If this loan will be your next financing method, all you need now is to find the right property to invest your money in. For that, you would want a reputable real estate like HAR to help you out.