Are closing costs stopping you from getting a loan? Have you been intrigued by the idea of a no closing cost loan? Well, you know what they say, “There is no such thing as a free lunch,” or is there?
Originating a mortgage involves some third-party vendors whose services are required to get your loan closed. A no closing cost loan implies that there will be no fees, but that is not entirely true. Every loan has different closing costs depending on the lender, here are some of the most common:
- Origination Fee – The origination fee is paid to the lender to prepare your loan from application to clear to close!
- Appraisal Fee – The appraisal fee is paid to a professional appraiser who comes to your home to assess its value. An appraisal ensures the loan is a good investment for the lender.
- Title Fees – A title proves that the seller legally transferred ownership to the buyer. Title insurance is required on all mortgage loans.
- Property Survey – Helps protect your investment by telling you the exact dimensions, size, and location of your home on the property. Also, it documents any land improvements such as a driveway in case of a boundary dispute.
- Credit Report – This helps the lender decide whether they offer the borrower credit or not and what terms they offer that credit.
- Flood Certificate – It shows the flood zone status of the property of interest.
- Settlements Agent Fee – The settlement agent manages the transfer of funds, properties, and legal documents to every party involved in the mortgage process.
- Underwriting Fee – The underwriters evaluate and verify the mortgage loan application and decide whether they approve or deny it.
- Mortgage Recording Fee – A government agency registers the purchase or sale of the piece of real estate to be a matter of public record.
Usually, closing costs are around 3%-6% of the home price. Many companies promise no closing costs to get buyers to believe the lender is saving them money. So, the promise of no closing costs is enticing for buyers who don’t have a lot of money for upfront costs or for a refinance borrower who doesn’t plan to stay in their home for more than five years.
So, how do you avoid paying closing costs?
Your lender may allow you to take a higher interest rate in exchange for waiving your closing costs. In this case, your principal amount is not affected but, your monthly payment will be slightly more every month.
Not every lender offers mortgages with no closing costs and not every borrower is eligible for this option. When you decide to roll in the closing costs into your loan, your loan officer will calculate your payment to make sure you can cover the extra expense in your monthly payment. Using a mortgage amortization calculator, your loan officer can compare the difference between what you would pay in interest on a no closing cost loan versus a standard loan.
One of the residual benefits of a no-closing cost mortgage is that you can take the money you would have used for closing costs and pay off other debt that has a higher interest rate. Mortgage interest rates are usually lower than home equity loans and credit cards.
If you plan to be in your home for more than five years, the no closing costs option might not make sense. You may end up paying more over time with a no-closing costs mortgage at a higher rate than you would if you paid the closing costs upfront.
Understanding all your options will help you pick the best program for you. The right decision depends on your unique situation.
