No Closing Cost Loans

You have heard about no closing cost loans but what does it really mean? No closing cost loans usually mean you will not pay any lender fees such as origination points, processing, underwriting, application fees, etc. Sometimes the no closing cost loan will also mean you do not pay the appraisal fee either. The third party fees, such as title insurance, closing fee, and your escrow reserves for taxes and insurance will remain your responsibility.

We all know that nothing is free in this world so why would a broker or bank offer no closing costs? How would they make money? They make their money by offering you a higher interest rate in return for “no closing costs.” The broker will collect a larger commission from the lender and the bank will collect higher interest rates from the borrower. Why would you consider a no closing cost loan?

A no closing cost loan might make sense for somebody who is keeping their loan for a short period of time. Financially, the higher interest rate will cost them much less over a shorter period than higher fees and a low interest rate over that same period.

EXAMPLE:

You want to take out a 30 year fixed mortgage for $200,000. You have two options below:

Option A: Interest rate of 6% and $4000.00 in closing costs

Option B: Interest rate of 7% and $0.00 in closing costs.


Option A has a principal and interest payment of $1199.11 per month. Option B has a principal and interest payment of $1330.61 per month. Option A has a payment savings of $131.50 per month but has $4000.00 in closing costs.

Let’s say you KNEW you were going to be moving in 12 months. Over 12 months, Option A will save you $1578.00 v.s. Option B in interest payments. However, it cost you $4000.00 to get that 6% rate to make those savings. In reality, if you went with the lower rate and normal closing costs, it will have cost you $2422.00 more over the 12 month period v.s. taking Option B with no closing costs.

As a general rule, if you plan on keeping your loan for a short period of time, consider a no closing cost option. Over the long term, paying closing costs and obtaining a lower interest rate is a better option.