What Is a No Closing Cost Mortgage? Pros and Cons
This article details the meaning of no closing cost mortgages, their pros and cons, and how they compare to traditional mortgages. Learn more about this type of financing and if it fits your needs.
What Is a No Closing Cost Mortgage?
A No Closing Cost Mortgage is a type of mortgage in which the closing costs associated with closing the loan such as appraisal fees, title and registration fees, credit report fees and other related expenses are rolled into the loan balance or waived entirely. This type of mortgage has become increasingly popular as it can help buyers easily buy a home without having to pay the closing costs associated with the loan upfront. This can be attractive to buyers who may be tight on cash.
Pros of a No Closing Cost Mortgage
The primary benefit of a no closing cost mortgage is that it offers buyers the opportunity to purchase a home without having to come up with the large sum of money needed to cover the closing costs associated with the loan. This can be especially helpful for first-time homebuyers who may not have the cash on hand or the access to financing needed to cover the closing costs. Additionally, a no closing cost mortgage can be ideal for those who may be facing cash flow issues due to a high interest loan or other large financial obligations.
Another advantage to getting a no closing cost mortgage is that the buyer will not be required to pay for other loan costs such as title insurance or private mortgage insurance prior to closing. This can help buyers to save money, as these costs can add up quickly when they are paid upfront. Finally, this type of loan can also be easier to qualify for than other types of mortgages, as buyers do not need to have the funds available to cover the closing costs.
Cons of a No Closing Cost Mortgage
The primary disadvantage to a no closing cost mortgage is that the loan may come with a higher interest rate than other types of loans. This is because the lender is not able to recoup these costs upfront and will increase the loan's APR to make up for this. Additionally, the loan costs that have been waived may also come with fees that can increase the overall cost of the loan. In some cases, these fees may be rolled into the loan balance, which could increase the total amount that the buyer will have to pay in interest over the life of the loan.
Finally, buyers should also be aware that they may not be able to deduct the costs associated with the loan on their taxes. This is because these expenses are considered to be prepaid interest and are not eligible for tax deductibility.
Conclusion
A no closing cost mortgage can be a great option for buyers who may be tight on cash or cannot qualify for other loan programs. However, buyers should be aware that the loan may come with a higher interest rate and that the overall cost of the loan may be higher than other types of mortgages. Finally, buyers should also be aware that the costs associated with the loan are not eligible for tax deductibility.