Every home loan and refinance comes with closing costs, which can be a hurdle if you’re short on the cash needed to seal the deal. Wouldn’t it be nice if, instead of paying these four- or five-figure expenses all at once, you could put them off … for years? Enter the no-closing-cost mortgage.

Instead of being paid in a lump sum when you buy a home, the various fees are rolled into the loan balance or padded into your mortgage interest rate.

Sound like a good deal? It can be, but only after you weigh the pros and cons. Here’s how no-closing-cost mortgages work and how to decide if one is right for you.

Key takeaways

  • Many lenders offer no-closing-cost mortgages, meaning you don't need to pay the closing costs upfront when you buy a new home.
  • Instead, closing costs are rolled into the loan balance or compensated for in the form of a higher interest rate.
  • On the plus side, no-closing cost mortgages mean less immediate outlay. On the downside, these loans tend to cost more over their lifetimes.

What is a no-closing-cost mortgage?

First thing to know: the name “no-closing-cost mortgage” is a bit of a misnomer. Closing costs don’t magically disappear. It’s just that you’re not paying them all at once, in cash, on closing day.

“You’ll still be responsible for these fees,” explains Chuck Meier, senior vice president and mortgage sales director for St. Paul, Minnesota-headquartered Sunrise Banks. “The only difference is that, under a no-closing-cost mortgage, your lender will either add those fees onto your principal balance or charge you a higher interest rate on the loan to cover those closing costs.”

How much are mortgage closing costs?

Virtually every homebuyer incurs closing costs. Some of them include charges for expenses essential to any real estate transaction, like the home inspection, home appraisal, title fees, municipality deed or mortgage registration taxes and recording fees. Others cover things directly related to the mortgage: costs for its underwriting, processing and origination.

The amount you will be charged for loan-related closing costs varies based on your lender, the price of your home and the amount of your loan, but typically ranges between 1 percent and 4 percent of the loan amount, according to Matthew Posey, a certified mortgage planning specialist with Axia Home Loans in Austin, Texas.

Depending on the final percentage, if you were to borrow a $300,000 loan, for example, your closing costs could range from $3,000 to $12,000.

How no-closing-cost mortgages work

Make no mistake: You can’t get around paying for closing costs (there are only a few exceptions), but you can avoid having to pay them on closing day with a no-closing-cost mortgage. Lenders usually offer a couple of different options.

Option A involves rolling those combined costs into your loan balance. Let’s assume you’re seeking to borrow $250,000, and your closing costs total $8,000. That means your mortgage principal — the amount you’ll actually borrow — is $258,000.

Option B involves paying a higher interest rate on your loan. Say you qualified for a 30-year mortgage at a fixed rate of 6 percent. The lender might offer to up your interest rate to 6.5 percent (50 basis points higher) to cover your closing costs.

“With either of these choices, you will not pay the closing costs out of your bank account. But you will still pay for these closing costs over the life of your loan,” Posey says.

No-closing-cost mortgage vs traditional mortgage

No-closing-cost loans are appealing because they let you buy a home without needing to shell out thousands of extra dollars —at a time you’re probably feeling strapped by plenty of other expenses (the down payment, moving costs). However, it’s important to think about the long-term. You’ll be paying for the higher cost of a no-closing-cost loan for years to come — 15, 30 or whatever your mortgage term is.

Imagine you plan to buy a $500,000 home with a 20 percent down payment. That means you’ll need to borrow $400,000 to finance the purchase. You get two quotes for 30-year loans, a traditional mortgage at 7 percent interest and a no-closing-cost loan at 7.5 percent.

Let’s say closing costs on the traditional mortgage come to 3 percent of the principal – $12,000. Your monthly payment on the traditional loan would be $2,661; the payment for the no-closing-cost loan would be $2,797.

Just $136 more a month for the no-closing-cost option doesn’t sound like much. But look how it adds up over time, according to Bankrate’s loan amortization calculator.

Years Elapsed Total Paid Traditional Mortgage* Remaining Balance Traditional Mortgage Total Paid No-Closing-Cost Mortgage Remaining Balance No-Closing-Cost Mortgage
*includes principal, interest and closing costs paid upfront
1 $43,932 $395,936.76 $33,564 $396,312.66
5 $171,660 $376,526.36 $167,820 $378,469.75
10 $331,320 $343,249.53 $335,640 $347,179.95
20 $650,640 $229,200.31 $671,280 $235,620.59
30 $969,970 $0 $1,006,920 $0

With the no-closing-cost loan, you’ll have paid less overall until partway through the 10th year of your loan, though you’ll also have accrued slightly less home equity. But then, the accumulated cost (augmented by the additional interest) begins to kick in. By the end of the mortgage terms, the overall cost of the traditional loan comes to nearly $37,000 less than that of its no-closing-cost counterpart.

How to find no-closing-cost mortgages

The majority of lenders provide no-closing-cost mortgages, so if your preferred lender doesn’t, shop around.  As you compare lenders, make sure you understand all aspects of the loan offer, including closing costs and any no-closing-cost options. A mortgage calculator can help you crunch the numbers to estimate and compare your total costs with both traditional and a no-closing-cost mortgage.

Before committing to a no-closing-cost arrangement, consider how long you plan to stay in the home and how much cash you have on hand that you’re willing to part with upfront.

Pros and cons of a no-closing-cost mortgage

Carefully weigh the pluses and minuses of choosing a no-closing-cost mortgage.

Pros of no-closing-cost mortgages

There are some key advantages to consider when deciding whether a no-closing-cost loan is right for you.

  • Less cash to close. “The pros include not having to pay those additional fees with liquid funds,” notes Daniel Hill, CFP and president of Hill Wealth Strategies in Richmond, Virginia. You won’t need to drain savings accounts or sell stocks to come up with as much money upfront, incurring the risk of becoming house poor.
  • More liquidity down the road. You can use the money you didn’t spend on closing costs for an emergency fund, a home-maintenance fund, general savings or even investments.
  • Easy payments. “There’s also the convenience of having your closing costs divided among your mortgage payments over the life of your loan,” Hill notes.

Cons of no-closing-cost mortgages

Before applying for a no-closing-cost loan, consider these drawbacks.

  • Fewer options. Almost every mortgage lender offers traditional loans with closing costs but not all lenders have no-closing cost loans. You’ll have fewer options to work with which can make it hard to shop around for a good deal.
  • Less home equity. Because you’re financing a larger amount of the home purchase, you start out with less of an outright ownership stake in your home.
  • Bigger interest bite. “You’ll probably be getting a less-attractive loan than you otherwise would if you were willing or able to pay for closing costs,” cautions Rajeh Saadeh, a Somerville, New Jersey-based real estate attorney. “You’ll likely pay more interest over your loan’s term, depending on how long you stick with that loan.”

Case in point: Using the previous scenario, if you borrow $400,000 over 30 years at a 7 percent interest rate and pay your $12,000 closing costs out of pocket on closing day, the total cost of your mortgage — principal and interest alone — would be $957,970 by the term’s end. However, if you choose to roll your closing costs into your mortgage, now with its higher interest rate (going from 7 to 7.5 percent), your total loan costs over 30 years would be $1,006,920.

In other words, you will have paid $48,950 extra just in interest — a lot more than shelling out the original closing cost lump sum of $12,000.

How to decide if a no-closing-cost mortgage is right for you

There are advantages and disadvantages to no-closing-cost home mortgages, and not everyone is a good candidate for one. It’s generally best for those buying a starter or temporary home that they’ll leave within a decade or so (as opposed to buying a forever home). Or of course, those who are absolutely strapped for cash, making a five-figure upfront payment a real problem.

If closing costs are a burden, a no-closing-cost mortgage isn’t your only option. You could try to negotiate your closing costs, asking the seller to pay for all or a portion of them. You should ask the lender if it can waive or discount any of their charges, as well.

If you’re working with a mortgage broker, they might even be able to help you find a low-fee lender, or one who just rolls the closing costs into the principal, but doesn’t hike the interest rate, on its no-closing-cost mortgages. (You’ll still pay more in interest because the mortgage principal is bigger, but the bite won’t be as bad).

Ultimately, the right option comes down to your longer-term plans, and whether it benefits you to keep your assets liquid now, as opposed to later.