No-Closing-Cost Mortgages: Less Today, More Tomorrow

The bargaining is done, the contracts are in motion, and you are almost the owner of a new or refinanced home. But before the keys are handed over or the final signatures applied, there’s the complex matter of closing costs.

Depending on the mortgage or refinance, closing costs can be a burden, totaling thousands extra that must be paid at the time of closing. These costs are often forgotten in the flurry of offers and counteroffers, inspections and arrangements, and the procurement of a down payment. To ease the burden of expensive and often unexpected costs at closing, “no-closing-cost mortgages” have gained in popularity.

Simply put, these mortgages offer relief from closing costs. But they do it at a price. No-closing-cost mortgages roll the costs into the total mortgage amount. Borrowers avoid the potential pain of thousands in upfront payments, but in exchange receive a slightly higher loan amount. This affects monthly payments by adding to the principal, but also to the interest amount.

So why is a no-closing-cost mortgage a valuable alternative? Consider the sheer amount of closing costs associated with a mortgage:

·        Points – often called discount and origination fees, points are paid to the lender funding the loan and the broker processing the loan. One point equals 1% of the loan amount.

·        Appraisal

·        Inspection/property survey

·        Title, including attorney’s fees, title insurance, transfer tax, and recording tax

·        Escrow

·        Notary/Recording Fees

·        Prepaid interest (interest that accrues between closing and the end of the closing month - paid in advance)

·        Miscellaneous “garbage” fees, including document preparation, credit report processing, underwriting, administration, additional processing, etc.

There are situations in which a no-closing cost loan is recommended due to the increased flexibility and decreased initial cost. A no-closing cost loan might be right for you if:

·        You are planning to own the property less than five years. In this situation, a no-closing-cost mortgage can save money with immediate ownership at a lower upfront price. 

·        You are refinancing. Homeowners looking to save costs through refinancing can take advantage of lower interest rates without painful closing costs.

·        Your cash available at closing is limited.

On the flip side, a no-closing-cost mortgage may not make sense if the seller is paying all or some of a buyer’s closing costs, or you are planning to own the property for more than five years. A lower rate provided by normal mortgages will pay off over a long period of time, and closing costs will be recouped by the savings during this time as well. An excellent source for a no closing cost refinance mortgage.

In today’s turbulent housing market, borrowers are extremely on guard about misleading information from lenders, and more judicious with their increasingly precious credit and funds. While the idea and name of no-closing-cost mortgages can seem to some like one of these traps, the key is to fully understand what the loans represent. By knowing that closing costs are not eliminated, but instead incorporated into the greater loan, homeowners can make more-informed, individual choices for their mortgage.

Remember that every lender is different, and every loan is different. By understanding the specifics of the no-closing-cost mortgage offered by your lender, and what this mortgage means for you now and in the future, you can make the best decision for your situation.

This article provided by ERATE with restrictions.