What is a no-closing-cost mortgage?

On average, closing costs account for about 2%-7% of a mortgage’s total. For some homebuyers, coming up with a sum of money that large can be difficult to budget for.

But a no-closing-cost mortgage can reduce the upfront fees when closing on a home. Instead, the closing costs might be rolled into the loan principal or result in a higher interest rate. Read on to learn more about how no-closing-cost mortgages work.

Key takeaways

• With a no-closing-cost mortgage, closing costs are typically bundled into the loan principal or repaid through a higher interest rate.
• Some lenders might offer no-closing-cost mortgages. It can help to compare offers to find the best interest rate and loan terms. 
• Paying closing costs over time—rather than upfront—may cost more in the long run.

For homebuyers who may not want to make upfront closing cost payments, some lenders offer no-closing-cost mortgages. With this type of mortgage, you typically either add your closing costs to your total loan amount or opt for a higher interest rate. With either option, you can expect to make larger monthly mortgage payments.

Closing costs are fees associated with closing on a mortgage or refinancing a home. They’re usually paid by the buyer—or homeowner if it involves refinancing—but the seller might pay for some of them. 

Closing costs typically include:

• Home inspection and appraisal fees
• Title search and title insurance costs
• Attorney fees
• Recording fees
• Origination fees
• Underwriting fees
• Escrow funds

The term no-closing-cost mortgage is a little deceptive. Closing costs might be part of what you pay, but they just aren’t paid upfront. 

Under a no-closing-cost mortgage, lenders might roll the fees into the overall loan principal or offer a larger interest rate. The structure lets borrowers avoid a big expense upfront, but it may end up costing more in the long run.

A no-closing-cost mortgage could help you avoid having to pay a large fee at the time of closing, and you may break even if you refinance or sell the home within a few years. However, you might want to explore any benefits and considerations before deciding.

Some benefits of using a no-closing-cost mortgage might include the following:

• You won’t have to pay your closing costs upfront.
• You might be able to put any savings toward home renovations or other financial needs.

Some considerations of using a no-closing-cost mortgage could include the following:

• There typically will be higher interest rates and higher monthly payments.
• You may have to pay private mortgage insurance (PMI) in your monthly payment. That’s because your home equity might be reduced from absorbing your closing costs into the mortgage principal.
• There generally will be higher long-term costs if you plan on staying in the home for many years.

When buying a home, it’s a good idea to consider closing costs as you’re determining how much you can afford. For some, it can be hard to come up with this money. With a no-closing-cost mortgage, closing costs are usually rolled into the loan principal or repaid through a higher interest rate.

Before deciding if a no-closing-cost mortgage is right for you, it can help to evaluate your financial situation and credit scores. That way, you have a better idea of the types of home loan offers that may be available to you. Learn how improving your credit score could help you score a lower interest rate.