The No Closing Cost Mortgage

For home-shoppers short on cash, no closing costs mortgages can make a home purchase a possibility.

This page:

  • Explains how a no closing costs mortgage works

  • Lists the benefits and drawbacks of these home loans

  • Links to lenders who offer low-rate no closing cost mortgages

This page concludes the section on special mortgages.

How no closing cost mortgage programs work

Under a no closing cost mortgage, the fees and taxes associated with closing a home loan are wrapped into the mortgage principal. In return, the buyer must pay a higher interest rate on the loan.

No closing cost mortgages feature LTVs of up to 110% or more (meaning you can borrow up to 10% of the home's value to pay purchasing costs). They often won't require a down payment or PMI either, meaning you can purchase a home even if you have virtually no cash on hand.

Of course, the flip side is the higher interest rate, which is often several percentage points higher than normal.

So the issue of the no closing cost mortgage is this: does the ability to buy now outweigh the expense of a higher interest rate?

The advantages of no closing cost mortgages

Well, you can guess the big plus here . . . you don't have to worry about all those fees and taxes that seem to pile up out of no where at mortgage closing time. And a higher LTV means more purchasing power. A house that was priced out-of-reach before becomes much more accessible.

Another advantage comes with tax deductions. Mortgage interest payments are all tax deductible, while many closing costs are not. So, even though the amount of interest paid will rise, at least your tax deductions will rise too.

Sidebar
Our recommended prime lender Eloan offers no closing cost loans with LTVs of up 107% (and no PMI or down payment requirements).
For those with credit problems, FullSpectrum Lending offers a large range of subprime home loan products, depending on your situation.

The disadvantages of no closing cost mortgages

Unfortunately, there are drawbacks to a no closing cost mortgage and they're hard to ignore.

The higher interest rate results in your paying many thousands of dollars more for your home should you keep the original mortgage for a long time.

And if you do opt to push the LTV over 100%, you face the unfortunate (and sometimes dangerous) reality of being "upside down" in your mortgage. During the beginning of the loan (perhaps for years), you won't be building any home equity, but instead paying your cash towards the huge finance charges. And having very little (or no) equity in your home is not a very secure position.

Of course, if you can bolster your monthly payments, or manage to refinance into a lower rate mortgage fairly quickly, you might still come out ahead. But it's wise to understand the "underdog" position you're putting yourself in.

Bottom line . . .

If you know you want to buy now, apply for a no closing cost mortgage from Eloan. They've got very low rates and all their products feature no lenders fees, which means one less (big) expense rolled into your loan principal.

Otherwise check out our guide to choosing a mortgage for more help setting up a healthy home loan.

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