The Pros And Cons Of A No Closing Cost Mortgage
What happens when you have the money for the down payment to buy a home but not for closing the sale? That's a problem!
Closing costs are fees associated with getting a mortgage loan. And those fees can add up, anywhere between 2%-5% of the loan.
If you can't pay closing costs, does that mean you can't buy a house? Not necessarily.
Sometimes the seller will pay part or all of the closing costs. But don't count on that! It's the exception to the rule. Actually, there's a more common way to solve the problem of paying for closing costs.
Is The No Closing Cost Mortgage Right for You?
Rolling closing costs into your mortgage loan isn't right for everyone. But for borrowers short on cash for upfront fees, it can be the difference between owning a new home or not.
But should you?
Adding the loan origination fee, title insurance premium, appraisal and title search fees into a mortgage loan will cost you a bit more on your interest rate.
But sometimes that can work to your advantage. How? If you're not planning to stay in your home for more than 5 years, then a no closing cost mortgage makes sense.
"You have to look at at the break even."
That's according to Cameron Findlay, executive VP of capital markets at Paramount Equity Mortgage.
In other words, if you're only planning to stay in the house for 4 years, you're most likely a good candidate for this type of loan.
It also makes sense to pay a slightly higher interest rate and forego closing costs if you need cash for repairs and renovations.
When Doesn't It Make Sense?
A no closing cost mortgage doesn't make sense if you're planning to stay in your home for longer than 5 years. You'll end up paying more.
It also makes sense to pay a slightly higher interest rate and forego closing costs if you need cash for repairs and renovations.
When Doesn't It Make Sense?
A no closing cost mortgage doesn't make sense if you're planning to stay in your home for longer than 5 years. You'll end up paying more.
For long term occupancy, more than 5 years, a higher mortgage interest rate could cost you more than the upfront closing cost fees. That's true whether you're buying a home or refinancing.
Choosing a no closing cost loan will saddle you with a higher interest rate over the life of the home loan. That means you're paying more than the upfront fees.
Here's an example. Let's say there are 2 loan options for a $250,000 loan. The first one has an interest rate of 4.5% and $3000 in closing costs, and monthly mortgage payments of $1,266.71. The second one has a 5% interest rate with zero closing costs, and mortgage payments of $1,342.05.
With the second option, you're paying $75.34 more each month. After 3 years of mortgage payments, you will have paid back the closing costs.
But for the remainder of the loan, the bank will make an extra $75 per month. Over the 30-year term, that's an additional $24,000. That's why this option works better for buyers planning to stay in the home for less than 5 years.
Another option is to consider re-financing after a few years. Still, there's no guarantee that interest rates will be competitive.
Here's an example. Let's say there are 2 loan options for a $250,000 loan. The first one has an interest rate of 4.5% and $3000 in closing costs, and monthly mortgage payments of $1,266.71. The second one has a 5% interest rate with zero closing costs, and mortgage payments of $1,342.05.
With the second option, you're paying $75.34 more each month. After 3 years of mortgage payments, you will have paid back the closing costs.
But for the remainder of the loan, the bank will make an extra $75 per month. Over the 30-year term, that's an additional $24,000. That's why this option works better for buyers planning to stay in the home for less than 5 years.
Another option is to consider re-financing after a few years. Still, there's no guarantee that interest rates will be competitive.
Alternative Low Cost Mortgage Options
An alternative to consider is an FHA loan, especially for first time buyers. This government backed loan requires down payments as low as 3.5%.
For service members and eligible veterans, look into VA loans. They offer competitive interest rates.
And remember, closing costs are not set in stone. Many fees can be waived or even reduced by lenders. Think application and loan origination fees.
The bottom line is this. No closing cost mortgage loans will get you into the house you want to buy. But is it worth it? Only you can answer that question!
When you're ready to close on your new home, consider Lilly Title & Settlement. We're woman-owned and a full service settlement agency serving Staunton, Waynesboro, and Augusta County.
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