A No-Closing-Cost Mortgage May Cost You More Over Time. Here’s How

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As if the down payment and monthly mortgage payments weren’t already expensive enough, closing costs can drive up the price of your new home purchase. 

Closing costs are highly variable, but can easily run you a couple thousand dollars or more. As an alternative, some lenders offer no-closing-cost mortgages to help you cover closing costs. 

But the name itself is a bit misleading.

You still have to pay closing costs with a no-closing-cost mortgage: they often just get included in your mortgage rather than being paid upfront. In other cases, you’ll take on higher interest over the life of your loan in exchange for a break in upfront closing costs, which may be more costly long-term. Here’s what you need to know before agreeing to a no-closing-cost mortgage:

What Are Closing Costs?

Closing costs are the fees associated with buying a house. 

They include things like appraisal fees, state and local taxes, any discount points, processing fees, and administrative fees, according to Catherine Okoroh, vice president of mortgage lending at Guaranteed Rate, a Chicago-based mortgage company. 

Homebuyers can expect to pay anywhere from 2.5% to 3% of their loan for closing costs and out-of-pocket expenses, according to Okoroh, but it can be difficult to gauge the exact amount before everything is finalized. 

The professionals you work with throughout the mortgage process can help you better understand the costs associated with your individual loan. “I always recommend going to your attorney for a breakdown of your closing costs,” says Maxine Teele, a real estate advisor at Keller Williams Realty in New York. Your mortgage broker is also a great resource for cost specifics. 

What Is a No-Closing-Cost Mortgage?

A no-closing-cost mortgage doesn’t mean you can get around paying closing costs altogether. It is simply a way to reduce your upfront payment. 

There’s no specific loan type for a no-closing-cost mortgage, though lenders sometimes use the term for marketing loans in which you can reduce upfront costs. In some cases, you may be able to roll some or all of the closing costs into your loan balance. 

But what many people are referring to when they use the term no-closing-cost mortgage is a lender credit, Teele says. You’ll take on a higher interest rate for the duration of your loan, and in exchange, your lender will give you a credit to use toward closing costs at signing.

Okoroh gives an example of a borrower taking out a mortgage at 3%. If they choose a no-closing-cost mortgage, the lender may raise the interest rate to 3.5% and offer $3,500 toward closing costs. In this example, the borrower is just paying for closing costs in the form of a higher interest rate, she says.

The exact increase in your mortgage rate may vary based on the lender, the loan type, and the market. But in general, says Katie May, sales manager at Redfin Mortgage, “to cover the entire closing costs, it’s going to be a significant rate increase.”

Should You Get a No-Closing-Cost Mortgage?

A no-closing-cost mortgage may help you save upfront, but it’s not always a good deal in the long run. 

“I don’t think it’s worth it to have a higher interest rate for the life of the loan just to cover a couple thousand dollars’ worth of closing costs,” Teele says. 

Pro Tip

Consider negotiating your costs down before closing, or using grants or seller concessions to help cover upfront costs.

As an example, consider a $346,800 house (the median sale price of homes in the U.S.) with a 20% down payment, a 30-year fixed mortgage with a 3% interest rate, and $10,404 (3% of the sale price) in closing costs. 

If you take a lender credit of $10,404 in exchange for a 1% increase in interest rate, you’ll end up paying an extra $155 per month. Here’s a breakdown of the difference in total cost for the life of the loan. As you can see, the extra 1% in interest amounts to an extra $45,000 in interest over the life of the loan:

Closing Costs Paid UpfrontInterest RateInterest PaidTotal Amount Paid Over the Life of the Loan (Closing Costs + Principal + Interest)
Loan A$10,4043%$143,807$431,651
Loan B04%$199,575$477,015

While a lender credit isn’t something Okoroh would usually present to a client upfront, she does acknowledge that there are situations where it might make sense.

“Every person has to weigh each scenario to determine what’s best for them,” Okoroh says. “There is not a one-size-fits-all mortgage for everybody.”

What Are Some Alternatives to No-Closing-Cost Mortgages?

Negotiation

Even if you can’t avoid closing costs entirely, you might be able to reduce them. 

Make sure you understand all the fees and costs associated with your mortgage, and ask your lender about those you may get waived or reduced. Shopping around with different lenders can also help you find the best deal.

While state and local taxes are non-negotiable, you might be able to negotiate with the people involved in the homebuying process — such as the real estate agent, the attorney, or the appraiser — on certain costs. 

“I would just have the conversation,” advises Teele. “It’s not an automatic ‘yes’ but it’s not an automatic ‘no.’ You won’t know until you ask.”

Grants

Certain grants and programs can also help cover upfront costs, especially if you’re a low-income or first-time homebuyer

Teele recommends assistance programs and grants for down payments and closing costs for anyone who has the credit and income for loan approval, but may not have the money saved upfront. 

Grants and assistance programs can be a big help in covering closing costs, as well as providing other resources to help you purchase a home. But stay aware of your timeline: some require qualification before you start the homebuying process

Programs vary by state, so search online to find out options available to you. Your real estate agent and mortgage broker can also help you find the right resources.

Seller Concessions

During the homebuying process, you can also negotiate with the seller to offset your closing costs, typically in exchange for a higher purchase price offer. This is known as a seller concession or seller credit. 

Unlike a lender credit, the credit is added to the purchase price of the house, not paid for by an increased interest rate.

For example, if you want to buy a $500,000 house, you might offer to raise the purchase price to $510,000 in exchange for a seller concession of $10,000. This would give you $10,000 upfront but raise your loan value. The interest rate stays the same, however. 

In comparison to a lender credit, a seller concession is often the better deal. “If you do a breakdown of the savings…it’s a lot less money by increasing the purchase price than increasing the rate,” says May.

One thing to remember, though, is that the house must still appraise for the amount of the seller concession. Teele gives an example of a house priced at $575,000 but only worth $565,000. In that case, a $10,000 seller concession on top of the $575,000 sale price is not going to appraise and you’re unlikely to get your seller concession.

Since this is only an option if a seller agrees, Teele stresses the importance of properly explaining a credit or concession to the seller, so they don’t feel like they’re losing. But with the right agent and mortgage broker, negotiating a seller concession is one way to offset your closing costs.

Bottom Line

Buying a new home is expensive, and closing costs are an unavoidable part of the process. 

Ideally, you should save enough money to cover all the upfront payments and fees you’ll incur before purchasing a new home. But if you’re looking for ways to save, or the costs are greater than you’re able to pay, a no-closing-cost mortgage can help you spread the cost over the lifetime of your loan. 

Just be sure you consider negotiation and payment assistance options — and consult with your lender — before making a decision.