As if the down payment and mortgage payments weren’t already expensive enough, closing costs can drive up the price of your new home purchase.

Closing costs vary widely, but can easily cost you a few thousand dollars or more. As an alternative, some lenders offer mortgages with no closing costs to help cover closing costs.

But the name itself is a bit misleading.

You still have to pay the closing costs with a mortgage without closing costs – they are often just included in your mortgage rather than being paid up front. In other cases, you’ll pay higher interest over the life of your loan in exchange for lower upfront closing costs, which can be more costly in the long run. Here’s what you need to know before accepting a mortgage with no closing costs:

What are the closing costs?

Closing costs are the costs associated with buying a home.

They include things like assessment fees, state and local taxes, everything points of call, processing fees and administrative fees, depending on Catherine okoroh, vice president of mortgages at Guaranteed Rate, a Chicago-based mortgage company.

Homebuyers can expect to pay between 2.5% and 3% of their loan for closing costs and out-of-pocket expenses, according to Okoroh, but it can be difficult to gauge the exact amount before it’s all out. finalized.

The professionals you work with throughout the mortgage process can help you better understand the costs associated with your individual loan. “I always recommend going to your lawyer for a breakdown of your closing costs,” says Maxine Teele, real estate advisor at Keller Williams Realty in New York. Your mortgage broker is also a great resource for cost details.

What is a mortgage with no closing costs?

A mortgage with no closing costs doesn’t mean you can just pay the closing costs. It’s just a way to reduce your upfront payment.

There is no specific loan type for a mortgage loan with no closing costs, although lenders sometimes use the term for marketing loans where you can reduce the upfront costs. In some cases, you may be able to transfer some or all of the closing costs to your loan balance.

But what a lot of people refer to when they use the term no-closing mortgage mortgage is lender credit, Teele says. You’ll get a higher interest rate for the life of your loan, and in return, your lender will give you credit to use to cover closing costs at signing.

Okoroh gives the example of a borrower who takes out a mortgage at 3%. If they choose a mortgage with no closing costs, the lender can increase the interest rate to 3.5% and offer $ 3,500 for closing costs. In this example, the borrower only pays the closing costs in the form of a higher interest rate, she says.

The exact increase in your mortgage rate may vary depending on the lender, the type of loan and the market. But in general, says Katie may, sales manager at Redfin Mortgage, “to cover all of the closing costs, it’s going to be a significant rate increase.”

Should you get a mortgage with no closing costs?

A mortgage with no closing costs can help you save up front, but it’s not always a good deal in the long run.

“I don’t think it’s worth having a higher interest rate for the life of the loan just to cover a few thousand dollars in closing costs,” Teele says.

As an example, consider a house of $ 346,800 (the median home selling price in the United States) with a 20% down payment, a 30-year fixed mortgage with an interest rate of 3% and $ 10,404 (3% of the sale price) in closing costs.

If you take out a lender of $ 10,404 in exchange for a 1% increase in the interest rate, you will end up paying an additional $ 155 per month. Here is a breakdown of the total cost difference over the life of the loan. As you can see, the additional 1% interest equals $ 45,000 additional interest over the life of the loan:

	Prepaid closing costs	Interest rate	Interest paid	Total amount paid over the term of the loan (closing costs + principal + interest)
Ready to	$ 10,404	3%	$ 143,807	$ 431,651
Loan B	0	4%	$ 199,575	$ 477,015

While a lender credit isn’t something Okoroh would typically present to a client upfront, they do recognize that there are situations where it might make sense.

“Each person should assess each scenario to determine what works best for them,” Okoroh explains. “There is no universal mortgage for everyone. “

What are the alternatives to mortgages without closing costs?

Negotiation

Even if you can’t avoid closing costs entirely, you may be able to reduce them.

Make sure you understand all the fees and costs associated with your mortgage, and ask your lender which ones you could waive or reduce. Shopping around for different lenders can also help you find the best deal.

Although state and local taxes are not negotiable, you may be able to negotiate with the people involved in the home buying process, such as the real estate agent, lawyer, or appraiser, on certain costs.

“I would just like to have the conversation,” advises Teele. “It’s not an automatic ‘yes’ but it is not an automatic ‘no’. You won’t know until you ask.

Subsidies

Some grants and programs can also help cover upfront costs, especially if you are low-income or first-time buyer.

Teele recommends down payment and closing assistance programs and grants for anyone who has the credit and income for loan approval, but may not have the money saved up front. .

Grants and assistance programs can be a great help in covering closing costs, as well as providing other resources to help you buy a home. But stay aware of your schedule: some require qualification before you begin the home buying process.

Programs vary by state, so search online to find out what options are available to you. Your real estate agent and mortgage broker can also help you find the right resources.

Seller concessions

During the home buying process, you can also negotiate with the seller to offset your closing costs, usually in exchange for a higher purchase price offer. This is called a seller’s concession or a seller’s credit.

Unlike a lender credit, the credit is added to the purchase price of the house and is not remunerated by an increased interest rate.

For example, if you want to buy a house for $ 500,000, you can offer to increase the purchase price to $ 510,000 in exchange for a concession of $ 10,000. This would give you $ 10,000 up front, but increase the value of your loan. The interest rate remains the same, however.

Compared to a credit lender, a seller’s concession is often the best deal. “If you break down the savings… it’s a lot less money increasing the purchase price than increasing the rate,” May says.

One thing to remember, however, is that the house has yet to assess for the amount of the seller’s concession. Teele gives the example of a house priced at $ 575,000 but only worth $ 565,000. In this case, a seller’s concession of $ 10,000 on top of the sale price of $ 575,000 will not be assessed and you are unlikely to get your seller’s concession.

Since this is only an option if a seller agrees, Teele stresses the importance of properly explaining a credit or concession to the seller, so they don’t feel like they are losing. But with the right agent and the right mortgage broker, negotiating a seller’s concession is one way to offset your closing costs.

Final result

Buying a new home is expensive, and closing costs are an inevitable part of the process.

Ideally, you should be saving enough money to cover all the upfront payments and expenses you will need to incur before buying a new home. But if you’re looking for ways to save money, or if the costs are more than you can afford, a zero-closing mortgage can help you spread the costs over the life of your loan.

Just be sure to consider negotiation and payment assistance options – and consult your lender – before making a decision.