What Is a No-Closing-Cost Mortgage?

With interest rates at historic lows, you may be thinking about refinancing your mortgage. You will typically spend a few thousand dollars in closing costs as part of the transaction. These closing costs can include lender fees, recording fees, taxes, home appraisal costs, and more.

In a no-cost mortgage, sometimes referred to as a no-fee mortgage, the lender absorbs the up-front costs by either raising the balance of the loan or charging a higher interest rate.

What Are Mortgage Closing Costs?

When you take out a mortgage (either for a purchase or a refinance), you’ll pay a variety of expenses, most of them listed here in our closing cost guide. Some of the most common include:

• Lender fees
• Government recording fees
• Setting up an escrow account for taxes and insurance
• Costs for a home appraisal

Pay careful attention to the breakdown of your closing costs so that you avoid paying for unnecessary items.

What Is a No-Closing-Cost Mortgage?

Generally, closing costs are paid when the loan is released to the borrower. Some are paid by the seller, with most paid by the buyer. A no-closing-cost mortgage is a purchase or refinance where you don’t pay any closing costs at the time of the loan’s release.

While having zero or low costs at the time of closing sounds great, don’t forget that if something sounds too good to be true, it probably is. You’re still going to pay those costs—in the future.

Most terms of your mortgage refinance are negotiable, so how these costs are paid is up for discussion between you and your lender. Lenders and mortgage brokers don’t work for free, so many of these items still need to be accounted for. In a no-closing-cost mortgage, lenders typically recoup these costs in one of two ways. One way is to add them to the principal balance of your new loan. The other way is by charging a higher interest rate to do a no-closing-cost refinance.

Should You Refinance with a No-Closing-Cost Mortgage?

Whether to refinance your mortgage is a complicated decision, and the answer may differ according to each situation. The best way to decide if you should refinance at all is to run the numbers. Look at the total one-time closing costs that you’ll have to pay, then compare that number to the amount you’ll save each month with your mortgage payment. If it will cost you $2,000 to refinance and you’ll save $200 with every payment, then you’ll pay back those costs in 10 months.

You can do the same sort of analysis when deciding if you should use a no-closing-cost mortgage refinance. But in this case, you also need to look at how rolling the closing costs into your loan affects your monthly payment. You’ll want to ask questions such as “Is it worth it to me to pay $1,000 now to save $25 each month for the remainder of the term of my mortgage?”

Having an idea of how long you plan to stay in your current home can help inform your decision-making process as well. While you never know when your situation can unexpectedly change, if you already know that you’re planning on moving in a few years, then a refinance makes less sense. Since most refinances have you pay some up-front costs in exchange for lower monthly payments, if you are planning on staying only briefly, then making back those initial costs will be difficult.

The Bottom Line

A no-closing-cost mortgage may seem like an amazing deal at first, but a closer examination reveals potential disadvantages. For starters, closing costs don’t go away—those fees are just collected in the future. Run the numbers. See what the deal will cost and how much you’ll save each month. That will help you make the best financial decision for your situation.