Aah, the no closing cost mortgage - the best mortgage advertising scheme ever produced - NOT! Let's start off by looking at what does the term "closing cost" mean. Then we'll look at what it means to get a mortgage with no closing costs.
What Are Closing Costs?
Closing costs are fees associated with a mortgage loan. No matter whether you are getting a first mortgage or a second mortgage, there are fees, or closing costs to pay. These costs may include a fee for the following:
- an application fee (banks like to charge this one),
- an appraisal (required by the mortgage lender to determine the property’s value),
- credit report (to see if you qualify with your credit),
- courier/overnight shipping charges (loan documents and money transfers are time sensitive),
- title insurance (required by the mortgage lender to protect them and sometimes you against any errors in the chain of custody of the property),
- title agent closing or signing services (the notary who is present when you sign your loan documents to make sure it is really you signing them),
- real estate taxes (local, city and sometimes state taxes apply),
- deed recording (paperwork is filed at the courthouse to make your mortgage and home ownership public knowledge),
- underwriting (person approving your loan at the mortgage lender),
- processing (the person who puts your loan paperwork together for the underwriter to look at),
- and finally your loan officer needs to get paid
This list isn't exhaustive, but these are some of the typical things that have to get paid when you get a mortgage. Mortgages don't get done magically, they take real work by real people and everyone needs paid. (For a deeper discussion of closing costs and the costs of getting a mortgage)
What Does No Closing Cost Mortgage Mean?
So what's the catch: no closing cost mortgages have higher interest rates than mortgages with closing costs. Mortgage companies and their loan officers are given wholesale (no retail markup) interest rates on all kinds of different loans from the lenders they work with. To make money, the loan officer has to mark up the interest rate they offer you (increase the interest rate) and/or charge you points. Another way to say "points" is origination fees, mortgage broker fees, and loan discount fees.
On average closing cost fees add up to be approximately 3-5% of your loan amount. For example if you were borrowing $200,000 then your closing costs would be somewhere between $6,000 and $10,000. If you don't pay for these things out of your pocket directly then you will pay for them with a higher interest rate which means a higher monthly mortgage payment.
A no closing cost mortgage is not a bad loan. For some situations it is a great loan. The problem with these loans is not the loan itself, but rather the advertising for them. The advertising for this kind of mortgage is sometimes a little deceitful as it never really tells you that there are fees included in your mortgage and that you could get a lower interest rate if you decided to pay your closing costs yourself. So don’t be fooled thinking you're getting a free mortgage.
You May Consider A No Closing Cost Loan If:
- You are only going to have the loan a few years. Rule of thumb, if you are going to pay points or closing costs if you are going to stay in your property or loan for more than 4 years.
- If you didn’t have the cash on a purchase loan to pay the closing costs out of your pocket.
- If you didn’t have the equity on a refinance to pay the closing costs either out of your pocket, or out of the equity in your house.
Before you take a no cost mortgage, ask the mortgage company to provide you with what your closing costs would be if you paid them yourself. Also ask what the interest rate would be as well as the monthly payment. Take a look at the numbers yourself. You need to say what works for you. Don’t let the mortgage company sell you something that in the short or long term doesn't serve you.
There is a lot of information on the Internet on no cost mortgages. A simple search on any search engine would give you this information. Here is a link to more information on GetPreQualified.com to help you with further questions about no closing cost or no fee mortgages. We'd be happy to review your loan scenario with you to see if it works for your short and long term financial needs.
(New site)