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No-Closing-Cost Mortgage: Is It Actually Worth It?

No-closing-cost mortgages allow homebuyers and refinancing homeowners to spread out borrowing expenses over time instead of paying upfront.

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By Amy Fontinelle

Written by

Amy Fontinelle

Writer

Amy Fontinelle is a personal finance journalist with over 15 years of experience. Her work has been featured on Forbes Advisor, The Motley Fool, NewsBreak, Reader's Digest, USA TODAY Blueprint, and Fox Business.

Edited by Reina Marszalek

Written by

Reina Marszalek

Senior editor

Reina is a senior mortgage editor at Credible and Fox Money.

Updated September 24, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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Closing costs are the expenses you’ll pay for getting a mortgage. They cover services that involve determining the home’s value, making sure the title is clear, and processing the loan.

Closing costs can amount to thousands of dollars, making them a potential barrier to anyone who wants a mortgage. To address this problem, lenders offer no-closing-cost mortgages that allow you to spread out the expense over time instead of paying it upfront.

What are mortgage closing costs?

Closing costs typically total 2% to 5% of the loan amount, and they apply whether you’re buying or refinancing. For example, that’s $5,000 to $12,500 on a $250,000 mortgage — a sum that can be especially daunting if you’re a first-time homebuyer.

Common-closing-costs-infographic.webp

The range is broad because costs vary by location and provider. Nationwide, closing costs on an average home range from 2% to 6% of the loan amount.

Here are a few common closing costs. The example assumes a $250,000 loan.

Closing cost
Amount
Origination fees[1]
$2,500
Appraisal
$350
Home inspection
$400
Lender's + owner's title insurance
$1,250
Credit report
$30
Property survey
$100
Escrow/settlement fee
$500
Total
$5,130
[[1]Assumes a 1% origination fee.]

Additional closing costs you might pay include:

  • Borrower’s title insurance: Although it’s optional, many buyers choose to purchase the coverage as it can protect you from potential title problems in the future.
  • Attorney fees: Some states require you to hire a real estate attorney to close on your home. Depending on the attorney, you’ll pay a flat fee or be charged by the hour.
  • Transfer taxes: This is the tax you’ll pay to have the title of the property transferred to you. A majority of states charge a transfer tax.
  • Upfront mortgage insurance or funding fees: You might have to pay these costs if you’re obtaining a government-backed mortgage, such as an FHA loan or USDA loan.

Learn More: How Much Does It Cost to Buy a Home?

What is a no-closing-cost mortgage?

If you get a no-closing-cost mortgage, you won’t have to pay closing costs upfront. In exchange, the lender will either pay your closing costs and charge you a higher interest rate, or add the closing costs to your loan amount.

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Tip

Consider negotiating closing costs to have the seller pay a portion of them.

Pros and cons of a no-closing-cost home loan

Here are the benefits and drawbacks you should be aware of if you’re considering a zero-closing-cost mortgage.

Pros

  • It might be easier to become a homeowner or refinance. Homeowners are usually keen to have a comfortable sum in savings so they can afford repairs and keep paying the mortgage during a financial setback. Paying thousands out of pocket might make you less financially stable — and some people just don’t have the cash.
  • Closing costs might be less expensive than they seem in the long run. If your closing costs are $10,000, your interest rate is 3%, and your loan term is 30 years, you’ll pay $5,178 in interest over 30 years. A 5% interest rate would increase the long-term interest cost to $9,326. However, if inflation is 2% per year, your effective interest rate is only 1%. That’s only $1,580 over the long run.

Cons

  • You might pay more interest in the long run. By not paying closing costs upfront, you’ll spend more since you’ll either borrow more or pay a higher interest rate instead. To counteract this, you could always make extra principal payments later.
  • You’ll have higher monthly payments. Financing $10,000 over 30 years at 3% interest costs an extra $42 per month. At 5%, it costs $54. But remember what we said about inflation.
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Tip

It doesn’t have to be all or nothing. You could pay some of your closing costs up front and finance the rest.

Should you get a no-closing-cost home loan?

The type of borrower most likely to benefit from a zero-closing-cost home loan is one who cannot or would prefer not to pay the costs upfront.

You should consider a no-closing-cost mortgage if:

  • You get a low interest rate
  • You’re short on savings but can comfortably make a higher monthly payment
  • You expect to move or refinance in a few years

You should avoid a no-closing-cost mortgage if:

  • You get a higher interest rate
  • You have the cash to comfortably pay closing costs upfront
  • You expect to keep your mortgage until it’s paid off
Meet the expert:
Amy Fontinelle

Amy Fontinelle is a personal finance journalist with over 15 years of experience. Her work has been featured on Forbes Advisor, The Motley Fool, NewsBreak, Reader's Digest, USA TODAY Blueprint, and Fox Business.