Out-of-pocket mortgage fees are optional
Mortgages always have a cost. Always.
Who pays those costs depends on the loan type, your lender, the mortgage rate, and your negotiating skills.
You don’t have to pay your own mortgage closing costs if you don’t want to. At least, you don’t have to pay them out-of-pocket.
Instead, you could keep more money in hand and have the lender pay your closing costs for you via a slightly higher rate.
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What is a no-closing-cost mortgage?
A no-closing-cost mortgage — or a no-closing-cost refinance — isn’t exactly what it sounds like. There are still closing costs. You just don’t pay them directly.
With a no-closing-cost mortgage, the lender covers part or all of your closing costs. In exchange, you pay a higher interest rate. The lender’s extra profit from your higher rate repays your closing costs in the long run.
In most cases, lenders can cover some or all of your closing costs, including loan origination fees, appraisal fees, title search and title insurance fees, and prepaid taxes and insurance.
Different names for no-closing-cost mortgages
Depending on the lender, a no-closing-cost mortgage loan can also be called:
- A zero-cost mortgage
- A no-cost mortgage
- Lender credits
- Rebate pricing
- Lender-paid closing costs
All these terms refer to the same arrangement, where you’ll pay a higher interest rate in order for the lender to cover closing costs.
This is no free lunch — if you keep the loan for a long time, you could end up paying more via the higher interest rate than you would have paid in upfront closing costs.
So you should think about how long you plan to keep your new loan before deciding on a no-closing-cost refinance or home purchase loan.
However, if you’re ready to buy a new home, or refinance your current home, but you don’t have the upfront cash, a zero-cost mortgage can be a smart way to lock in at today’s lower rates without having to wait and build your savings up.
Types of no-closing-cost home loans
There are several ways to structure a no-closing-cost mortgage. A lender might cover all your upfront fees or pay only select closing costs.
The amount and type of closing costs your lender absorbs will affect your interest rate, so it’s important to compare offers on equal footing.
As you compare zero-cost offers, make sure each lender covers the same items. For example:
- A mortgage lender may cover lender fees but not the third-party expenses or prepaid items (upfront property taxes and homeowners insurance)
- A lender may pay lender fees and third-party charges, but not prepaid items
- A mortgage lender may absorb everything, including loan costs and prepaid expenses
A lender that covers all three parts of your closing costs will likely charge a higher rate. Conversely, a lender that charges a lower rate is likely covering only its own fees, not fees from the appraiser, title company, or escrow service.
No-closing-cost mortgage example
For example, your various rate and fee options using a no-closing-cost mortgage might look like this:
- 3% rate — The borrower pays all closing costs, including lender fees, third party fees, and prepaid costs
- 3.125% rate — The borrower pays no lender fees, but does pay third party costs and prepaid costs
- 3.5% rate — The borrower pays no lender or third party charges, only prepaid costs
- 3.625% rate — The borrower pays nothing out of pocket whatsoever
None of these options are good or bad. Borrowers should understand that lower rates cost more upfront, and higher rates cost less upfront.
To be able to pay your closing costs, lenders increase your interest rate and use the extra profit from the loan to pay your costs.
It’s up to you to decide if the upfront savings are worth the higher interest rate and payment.
A no-closing-cost refinance can be a good idea because it eliminates the one big drawback to refinancing — the upfront cost.
For this to work, however, your new interest rate still needs to be low enough to create savings compared to your existing loan.
A higher interest rate will result in a higher monthly payment and a bigger long-term cost. So before using a no-cost refinance, you should check the numbers and determine:
- Will your monthly payments still be reduced at the no-closing-cost mortgage rate?
- How long do you plan to keep the mortgage before moving or refinancing again?
- How much more will you have paid in interest by the time you sell or refinance? Is this amount higher or lower than paying closing costs upfront?
Finding your ‘break-even point’
The longer you keep a higher interest rate, the more it costs. So at some point during the life of any no-closing-cost refinance, the extra interest you’re paying will outweigh the upfront money you saved.
This point at which the added interest cost starts to outweigh your savings is the “break-even point.”
You can use a mortgage calculator to help find your break-even point.
Just compare the monthly payment of your mortgage at different interest rates to see how much more you’ll be paying each month in exchange for the lender paying closing costs.
If a no-cost mortgage adds $100 a month, and your lender is paying $4,000 in closing costs, you’d break even after 40 mortgage payments — that’s three years and four months.
Is a no-closing-cost refinance worth it?
This kind of loan makes the most sense if you’re planning to move or refinance again before you reach the break-even point.
However, a no-closing-cost refinance can also make sense if you need to lower your monthly payment — maybe to free up cash for other expenses — and don’t have the cash to pay for refinance closing costs out of pocket. In that case, the short-term savings might be more important than the longer-term cost.
No-closing-cost vs. ‘rolled’ closing costs
A zero-cost loan isn’t the only way to eliminate closing costs when you refinance. Most homeowners also have the option to roll closing costs into their new loan balance.
Rolling closing costs into your loan is not the same as a no-closing cost refi.
By rolling in closing costs, you increase the balance of your mortgage principal, which means you’ll pay more interest in the long run. But your actual interest rate stays the same.
By contrast, a no-closing-cost mortgage refinance keeps your loan balance the same but increases your rate.
Which strategy is best for you?
Keeping your lower interest rate by rolling closing costs into the loan might save you more on interest. But it also increases your loan-to-value ratio (LTV), which could impact your refinance eligibility or your ability to cancel private mortgage insurance (PMI).
Your refinance options also depend on the type of loan you have.
For instance, FHA Streamline Refinance loans allow borrowers to include only upfront mortgage insurance fees in the loan amount. All remaining closing costs need to be paid out of pocket.
Note, including closing costs on the loan balance is only an option when you refinance — not when you buy a home. But you can get a no-closing-cost loan with a higher interest rate when you purchase real estate.
The right no-cost option depends on your particular mortgage.
You can compare both options when you’re shopping for refi offers to see which makes more sense for your financial situation.
Zero-closing-cost loans from a mortgage broker
A no-closing-cost loan looks a little different with a mortgage broker than it does when you’re working directly with a lender. That’s because the broker is an intermediary; brokers can help you negotiate the rate and terms of your loan, but they don’t control the end lender’s pricing.
However, a no-cost loan is still possible via a mortgage broker. You just need to know how they work.
Mortgage brokers collect a yield spread premium, or YSP, as payment to work on your loan.
The end lender pays this fee to the mortgage broker for delivering your loan. The YSP is the mortgage broker’s profit.
Using YSP to your advantage
Since you know about YSP, you can ask your broker to use it to engineer your no-cost home loan.
For instance, a broker getting paid a 1% YSP by the lender need not charge the borrower an origination fee. In this case, the YSP can save you one percent of your loan amount in out-of-pocket costs. A broker getting 2% YSP can cover even more of your closing costs.
When comparing no cost loans between mortgage lenders and brokers, ask for the same structure from each.
In other words, ask them all for offers with no lender fees. Third party costs like appraisal, credit report, title and escrow and recording fees should be fairly similar. Your taxes and insurance should be the same regardless of which lender you choose.
This allows you to look at just one variable: the interest rate.
Mortgage rates with no closing costs
The downside to a no-closing cost mortgage is that you’ll pay a higher interest rate. Even a slight increase in your rate can cost you thousands more over the life of the loan.
However, you should consider the interest rate increase in perspective.
Today’s rates are still relatively low. And that means many borrowers can accept a slightly higher rate while still ‘saving’ compared to homeowners who bought or refinanced a few years ago.
Many borrowers can accept a slightly higher rate with no closing costs, and still ‘save’ compared to those who bought or refinanced a few years ago.
Imagine you’re offered a 30-year fixed mortgage rate of 3%. Your lender is willing to cover closing costs but will increase your rate to 3.75%.
That’s a big increase compared to your original rate offer. But 3.75% is still about half the historic average for 30-year fixed-rate loans — and it’s less than most borrowers would have paid any year prior to 2020.
Yes, you should get the lowest rate you can to save money in the long run. But if a no-closing-cost loan is your only route to homeownership or refinancing, it’s not a bad deal.
The important thing is that you’re aware of the tradeoff between zero upfront costs and bigger long-term costs so you’re certain you’re making the right decision.
Tips to lower your no-cost mortgage rate
The lower your initial mortgage rate is, the lower your no-closing-cost mortgage rate will be.
To get a no-cost mortgage loan and a low rate, try to present a strong mortgage application. You’ll typically get a lower interest rate if you have:
- A credit score above 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)
- A shorter loan term (if you can afford the higher monthly payment)
Additionally, refinancing with at least 20% equity — or buying a home with a 20% down payment — can help you avoid private mortgage insurance (PMI) or FHA mortgage insurance premiums (MIP).
Eliminating mortgage insurance costs can go a long way toward reducing your monthly payment and making up for the increased interest rate on a no-cost loan.
But perhaps the most powerful way to lower your rate is to let lenders compete for your business. Get two or three quotes. Send the quote with the lowest rate and fee combination to one of the other lenders. See if that lender can beat it.
You may end up getting much of your closing costs paid for and get close to the full-closing-cost rate.
No-closing-cost mortgage FAQ
Closing costs usually range from 2-5 percent of your home’s purchase price. Some costs, such as underwriting or loan origination fees, are charged as a percentage of your loan amount. Other costs, such as the home appraisal, are charged as flat fees. Expenses such as transfer taxes and homeowners insurance premiums can vary based on the time of year you close.
A real estate transaction requires closing costs. If you can’t — or would rather not — pay them up front and out-of-pocket, you could accept a higher interest rate in exchange for your lender’s help covering these costs. Sometimes, buyers can get the seller’s help paying closing costs. Additionally, many first-time homebuyers qualify for local down payment and closing cost assistance programs.
A lot of banks advertise no-closing-cost home purchase and refinance loans, even though the charges still exist. What these lenders mean is that they’ll pay your closing costs in exchange for a higher mortgage rate. Before accepting this kind of mortgage, compare the additional long-term costs to your short-term savings. You may find you’ll save more paying closing costs out of pocket, if you can.
Buying a new home, or refinancing an existing home loan, will require closing costs. But instead of paying them outright, you could ask your loan officer about adding some of them to your loan amount. You could also get lender credits which amounts to accepting a higher interest rate in exchange for help covering closing costs. Or, you could ask the seller to help you pay closing costs. Sellers aren’t obligated to help. Be sure to ask before going under contract to buy the home.
You can get help paying closing costs in a variety of ways. Lenders could help in exchange for a higher interest rate or a larger loan amount if you’re refinancing. Down payment and closing costs assistance programs can help through grants and low-interest loans. (These programs vary a lot by location; most are for first-time homebuyers who haven’t owned a home in at least three years.) Or, you could ask friends or family members to contribute toward your goal of homeownership. Some buyers can get help from the home’s seller, though this is less likely to work when you’re facing competition from other buyers.
You can roll closing costs into your loan amount but only on a refinance loan — not when you’re buying a new home. Even with a refinance, you’re limited by your lender’s loan-to-value (LTV) requirements. For example, if you have a $200,000 home but can borrow only 80% LTV, your loan can’t exceed $160,000. If you owe $160,000 on your current mortgage, you wouldn’t have room in the new loan for closing costs. If you’re getting a cash-out refinance, you could use part of the cash out to cover closing costs.
What are today’s mortgage rates?
Purchase and refinance rates are still at historic lows. Many homebuyers and homeowners can get the lender to cover their upfront costs and still secure a great interest rate.
Make sure you compare no-cost pre-approval offers from a few different lenders if you want to go this route.
Check that each one is covering the same closing costs so you can make an apples-to-apples comparison of upfront costs and interest rates.