Going with a no-closing-costs mortgage is an option that many consumers consider when deciding what type of mortgage arrangement is in their best interests. Depending on the exact circumstances of the mortgage applicant, a mortgage with no closing costs can be very cost-effective on the front end. At the same time, it is important to realize that mortgages of this type may come with higher interest rates and possibly include additional fees and charges that offset that lower cost on the front end.
While many people assume that a no-closing-costs mortgage is free of the burden of closing costs, that is not actually the case. The difference is that with this type of mortgage, the debtor does not have to pay the closing costs up front. Instead, those costs are included in the overall financing for the loan, preventing the need for the out of pocket costs. This can be a great benefit for consumers who want to defer the closing costs in favor of applying a larger down payment to the actual debt, or who have very limited income and would not be able to manage the closing costs up front.
By freeing the cash that would have gone toward the closing costs up front, a no-closing-costs mortgage makes it possible for the new homeowners to redirect the money they would have used for closing costs to meet other needs, such as buying new appliances for the kitchen, or possibly investing in furniture for the new home. From this perspective, a no-closing-costs mortgage can be a wonderful way to allocate the available resources so that consumers are able to enjoy a greater level of comfort and satisfaction from the acquisition of the new home.
While a no-closing-costs mortgage is a great idea in some instances, there are some drawbacks that should be taken into consideration. Since the closing costs are not paid out of pocket on the front end, those costs are bundled into the total amount of the mortgage financing. This means that interest is assessed on those costs over the life of the mortgage. In addition, the lender may charge fees for providing this type of service to the debtor, an amount that is also bundled into the overall mortgage debt and is subject to interest over the life of the loan.
Before choosing to go with a no-closing-costs mortgage arrangement, take the time to do the math. Calculate the total amount of the monthly mortgage payments that will prevail if the closing costs and related fees are bundled into the total amount financed, then compare that amount to what would be paid if the closing costs were settled on the front end and not included in the financing. Should the difference be significant, and the applicant can reasonably afford to pay those closing costs independent of the mortgage financing, doing so is likely to save a lot of money over the years.