Mortgage fees are optional
Mortgages always have closing costs, whether you're buying a home or refinancing. However, you don't always have to pay for them out of pocket.
You can choose how your home loan is structured.
You could take your lowest price and pay the closing costs at your own expense. Or, you can ask your lender to cover the closing costs and pay a slightly higher interest rate.
These no closing mortgages are not always good business because a higher interest rate means you will pay more in the long run.
Today's mortgage rates
are so low that many borrowers can get the lender to cover their fees and still
Get an extremely low rate.
Find a mortgage with no closing costs (February 19, 2021)
In this article (jump to …)
What is a no closing cost mortgage?
A no-cost mortgage or no-cost refinance isn't exactly what it sounds like. There are still closing costs. You just don't pay for it yourself.
What a no-closing mortgage really means is that the lender will pay some or all of your closing costs. In return, you pay a higher interest rate. The lender's additional profit from your higher interest rate will pay back your closing costs in the long run.
Lenders can, in most cases, pay some or all of your closing costs, including borrowing fees, valuation fees, title search and insurance fees, and prepaid taxes and insurance.
Depending on the lender, a mortgage loan with no closing costs can also be:
Zero Cost MortgageFree Mortgage Lender LoansDiscount Pricing Closing fees paid by the lender
All of these terms relate to the same arrangement where you pay a higher interest rate to allow the lender to cover the closing costs.
This is not a free lunch. If you keep the loan for a longer period of time, you may end up paying more on the higher interest rate than you would have paid up front on the closing costs. So you should consider how long you want to keep your new loan before deciding whether to opt for a no closing fee refinance or a home purchase loan.
However, if you're ready to buy or refinance a home but don't have cash upfront, a zero cost mortgage can be a smart way to secure yourself at today's low interest rates without waiting and building your savings .
Check mortgage rates without closing costs (February 19, 2021).
Types of home loans with no closing costs
There are different possibilities
Structure a loan with no closing costs. One lender could cover all of yours
Up-front fees or only selected closing costs.
The amount and type of degree
The costs that your lender pays will affect your interest rate
Compare offers equally.
To compare zero-cost offers,
Make sure that every lender covers the same articles. For example:
The mortgage lender pays the lender's fees, but not third party charges or prepaid items (property taxes and homeowner insurance). The lender pays the lender and third party fees, but not the prepayments. The mortgage lender pays for everything, including borrowing costs and prepaid costs
One lender that covers it all
Three parts of your closing costs will likely be charged a higher rate. Vice versa,
A lender charging a lower interest rate is likely to only cover its own fees, not
Fees from the appraiser, the title company or the escrow service.
Example of a mortgage with no closing costs
For example yours
Different tariff and fee options could look like this:
2,750% rate – The borrower pays all closing costs, including lender fees, third party fees and prepaid costs2.875% rate – The borrower does not pay any lender fees, but rather the third party costs and the prepaid costs3,250% rate – The borrower pays no fees from the lender or third parties, only prepaid costs3.50% rate – The borrower does not pay anything out of pocket
Neither of these options is
good or bad. Borrowers should understand that lower interest rates cost more upfront,
and higher prices cost less upfront.
To be able to pay yours
Closing costs, lenders increase your interest rate and take advantage of the additional profit
out of the loan to pay your expenses.
It is up to you to decide whether the upfront savings are worth the higher interest rate and payment.
Refinancing without closing costs
Refinancing without closing costs can be a particularly good idea as it eliminates one major disadvantage of refinancing – the upfront costs.
For this to work, however, your new interest rate needs to be low enough that you can accept a slight rate hike and still get the savings you want.
A higher interest rate leads to a higher monthly payment and higher long-term costs. Before using any free refinance, it's a good idea to check the numbers and determine:
Will your monthly payments continue to be reduced to mortgage interest with no closing costs? How long do you plan to hold onto the mortgage before moving or refinancing? How much more did you pay in interest up to the sale or refinance? Is this amount higher or lower than the prepayment of the closing costs?
The point at which the additional interest costs outweigh your savings is the "break-even point".
With free mortgage refinancing, you will likely want to move or refinance before you break even.
If you need lower mortgage payments because your monthly budget is tight, the higher long-term costs may be less important. You might be satisfied with the monthly savings and lack of upfront fees.
As always, the right mortgage refinancing strategy will depend on your current loan and personal finances.
With shopping nearby, lenders can ask for closing and closing cost quotes to compare your potential interest rates and long term costs.
No closing costs compared to "rolled" closing costs
A zero cost loan isn't the only way to eliminate closing costs when refinancing. Most homeowners also have the option to include closing costs in their new loan balance.
Rolling in closing costs into your loan is not the same as having a no closing cost refi.
By increasing the closing cost, you increase your mortgage amount, which means you will pay more interest in the long run. However, your actual interest rate remains the same.
Compare this to a no-closing-cost mortgage refinance where your loan balance stays the same but your interest rate increases.
Each strategy has advantages and disadvantages.
Maintaining your lower interest rate by including the closing costs in the loan could save you more interest. But it also increases your loan-to-value ratio (LTV), which can affect your ability to refinance or your ability to terminate personal mortgage insurance (PMI).
Your refinancing options also depend on the type of loan you have.
For example, FHA and VA Streamline refinance loans only allow borrowers to include upfront mortgage insurance fees in the loan amount. All remaining closing costs must be paid out of pocket.
Note that including closing costs in the loan balance is only possible when you are refinancing – not when buying a home. However, when buying real estate, you can get a loan with no closing costs with a higher interest rate.
The right free option will depend on your particular mortgage.
You can compare both options when purchasing refi deals to see which makes more sense for your financial situation.
Compare mortgages with no closing costs (February 19, 2021)
Obtaining a zero graduation cost loan from a
A loan with no closing costs provides a
Working with a mortgage broker is a little different from working
directly with a lender. This is because the broker is an intermediary. You can
help you negotiate the interest rate and terms of your loan, but they don't control it
Stop Lender Pricing.
However, a free loan is still available
possible through a mortgage broker. You just have to know how they work.
Mortgage Brokers Collect a
Yield Spread Premium or YSP as payment for processing your loan.
The final lender pays this fee
to the mortgage broker for delivery of your loan. The YSP is the mortgage
If you know this, you can request
that the broker uses the YSP to create your free home loan.
For example a broker
If the lender receives a YSP of 1%, they do not have to charge the borrower for origination
Fee. In this case, the YSP can save you one percent of your loan amount
Out of pocket costs. A broker who receives 2% YSP can cover even more of you
When comparing no cost loans
Ask about the same structure between mortgage lenders and brokers
In other words, ask them all
for offers with no lender fees. Third party costs such as evaluation, credit
Reporting, title, escrow, and enrollment fees should be fairly similar. Your taxes
and insurance should be the same regardless of which lender you choose.
That way, you can only look at one variable: the interest rate.
Mortgage interest without closing costs
The disadvantage of a no closing mortgage loan is that you pay a higher interest rate. Even a slight increase in your interest rate can cost you thousands more over the life of the loan.
However, you should consider the rate hike in perspective.
Today's prices are at historic lows. This means that many borrowers can accept a slightly higher interest rate while “saving” than homeowners who bought or refinanced a year or more ago.
Imagine being offered a 30 year fixed mortgage rate of 2.875%. Your lender is willing to pay the closing costs, but increases your interest rate to 3.5%.
This is a big increase compared to your original quote. But 3.5% is still less than half the historical average for 30-year interest rates – and it's less than most borrowers would have paid any year before 2020.
Yes, you should get the lowest price you can to save money in the long run. If a no-closing-fee loan is your only way to get your home or refinance, it's not bad business.
The important thing is to understand the tradeoff between zero upfront costs and higher long-term costs so you can be sure you are making the right decision.
Tips for Lowering Your Free Mortgage Rate
The lower your initial mortgage rate, the lower your mortgage rate with no closing costs.
Try to get a strong mortgage application to get a free mortgage loan and low interest rate. You will usually get a lower interest rate if you:
A credit score over 720 A clean credit report with no late payments. A debt-to-income ratio (DTI) below 43%. A loan to value ratio (LTV) below 80% (meaning you have at least 20% home equity).
Additionally, refinancing with at least 20% equity (or buying a home with 20% less) can help avoid personal mortgage insurance premiums (PMI) or FHA mortgage insurance premiums (MIP).
Eliminating the cost of mortgage insurance can go a long way in reducing your monthly payment and offsetting the increased interest rate on a free loan.
But perhaps the most effective way to lower your interest rate is to let the lenders compete for your business. Get two or three quotes. Submit the offer with the lowest rate / fee combination to one of the other lenders. See if that lender can beat it.
You may get paid for a large part of your closing costs and are approaching the full closing cost rate.
What are today's mortgage rates?
Purchase and refinancing rates are still at historic lows. Many home buyers and homeowners can get the lender to cover their upfront costs and still get a high interest rate.
Make sure to compare free quotes from a few different lenders if you want to go this route. Make sure everyone pays the same closing costs so you can do an apple-to-apple comparison of up-front costs and interest rates.
Check your new plan (February 19, 2021)