A no-closing-cost mortgage is a home loan where the lender pays the borrower’s upfront loan costs in exchange for charging a higher interest rate or adding those costs to the loan amount.
A no-closing-cost mortgage can make buying a home more attainable — especially for first-time homebuyers — by reducing the upfront out-of-pocket expense. The trade-off is that the buyer likely will pay more over time by spreading out the repayment of closing costs.
What Are Closing Costs?
Closing costs include fees that a homebuyer must pay to get a mortgage and to assume legal ownership of the property from the seller.
Some common closing costs include:
- Credit report fee: Around $25.
- Origination fee: 1% of the loan amount.
- Appraisal fee: $300 to $600.
- Recording fee: $125.
- Home inspection fee: $300 to $500.
- Owners title insurance: $150 to $1,000.
- Survey fee: $200 to $1,000.
- Attorney fees: $500 to $1,500.
- Homeowners insurance: $1,000 per year, on average.
- Initial escrow payments: This usually covers the first two months of property taxes and may also include homeowners insurance premiums.
You’ll get an approximate idea of your closing costs from the loan estimate, which lenders must provide within three days of receiving your mortgage application. Closing costs are finalized in the closing disclosure, which your mortgage lender must provide at least three days before closing.
It’s enough to make a first-time homebuyer think, What if I can’t afford closing costs? That’s where the no-closing-cost mortgage comes in.
How Much Are Closing Costs?
Closing costs on a house typically add up to 2% to 5% of the home’s purchase price. For a home that sells for $438,200, which was the U.S. median sales price in February 2023,closing costs should be between $8,764 and $21,910.
This number will vary based on the home’s features and location, and the loan type. For example, in 2021, the highest closing costs for a single-family home were in Washington, D.C., with average closing costs coming out to $29,888. The lowest average closing costs were in Missouri, at $2,061. That same year, average closing costs increased by 13.4% over the previous year.
How a No-Closing-Cost Loan Works
With a no-closing-cost loan, the lender pays the borrower’s upfront closing costs in exchange for charging a higher mortgage interest rate or rolling the closing costs into the total loan amount.
While you’ll need less cash on hand to buy a home, your monthly payment will be higher and you’ll likely pay more over the loan term — usually 30 or 15 years — than if you paid the closing costs upfront. Talk to a lender and run their numbers yourself to be sure you understand the true cost of a no-closing-cost mortgage.
Who Offers No-Closing-Cost Mortgages?
Many lenders — including those that fund government-backed loans — offer no-closing-cost mortgages. These loans are sometimes called no-fee mortgages, zero-closing-cost mortgages, or no-closing-fees mortgages.
When borrowers apply for a no-closing-cost mortgage, lenders will look at the same qualifications as they would for any mortgage. They will consider your credit score, savings, and debt-to-income ratio, among other factors.
How To Decide If a No-Closing-Cost Mortgage Is Right for You
The best way to decide if a no-closing-cost mortgage is right for you is to evaluate your priorities and run the numbers.
“(A no-closing-cost mortgage) allows you to avoid paying the upfront costs out of pocket, which can be helpful if you don’t have the cash on hand, or if you prefer to keep your savings intact,” says Cassie Alongi, a real estate broker and co-founder of We Buy Any House in California, a real estate investment company based in La Quinta, California. “Also, you can be able to tackle your home repairs, fix or buy appliances, and do some remodels with the cash you have at hand and not using to finance closing costs.”
Alternative Ways To Save On Closing Costs
Other ways to reduce closing costs beside taking out a no-closing-cost mortgage include:
- First-time homebuyer grants. Check with the Department of Housing and Urban Development and local government and housing agencies to see if you qualify for financial help. You also can check if there’s down payment assistance for first-time homebuyers, which can free up some funds for paying closing costs.
- Government lending programs. For qualified borrowers, Veterans Affairs loans, Federal Housing Administration loans, and Department of Agriculture loans have lower down payment and credit score requirements.
- Negotiating with your lender. It can be worthwhile to negotiate with your mortgage lender and look for fees that may be waived or reduced.
- Shopping around. Don’t just go for the first lender you find. Shop around and compare loan offers to find the best fit for you.
Here are answers to some frequently asked questions about no-closing-cost mortgages.