Let’s get this straight and right up front: every real estate transaction will have closing costs – title fees, origination fees for a loan (if you need to finance the property), and recording fees, just to name a few.
So, how can a buyer purchase a house without actually paying those closing costs? Well, read on for more!
What this really means is that the closing charges are folded into the loan balance — if the house can appraise for the selling price plus the closing costs.
And there are pros and cons to doing this, as will be highlight later.
It’s also likely that not every single closing cost can be rolled into your loan. The buyer will most likely still be required to pay some fees at the settlement table. Those specifics will vary by lender.
I’m linking to a fantastic article by Hal Bundrick at Nerdwallet – he’s a personal finance writer as well as a certified financial planner. You can find the entire article here…but I’ve highlighted a few excerpts:
What Are Closing Costs?
“Closing costs” is a collective term for the various fees and charges you’ll encounter when buying a home. Some of these fees come from the lender and others come from third parties that are involved in the transaction, like home appraisers, homeowner associations (HOAs), and title companies.
How much are closing costs usually?
On average, homebuyers pay closing costs ranging from 2% to 5% of the purchase price. Unfortunately, this is only a ballpark figure, as there are many variables in each individual transaction. You can find out more specifics on closing costs here…
Many lenders will require that you apply for a loan prior to receiving a more precise estimate of closing costs; however, some lenders are more transparent with their available options and will do the necessary legwork to provide you a better idea of those costs.
Can you buy a house with no closing costs?
The reality is that closing costs have to be paid one way or the other – and by some or all parties in the transaction. Your decision will be whether you pay them with cash when you sign your loan, or as an added expense in each monthly mortgage payment.
How a no closing cost purchase works – it’s all in the financing
Per Bundrick in his article: “lenders can structure no closing cost loans in two ways. The differences between them are subtle, yet the result is the same.”
- You finance the closing costs. In this case, the lender will add your closing costs to your total loan balance. Your monthly payments will be slightly higher, and you’ll be paying these closing costs, with interest, for the full term of your loan — so, for example, over a period of 15 or 30 years.
- The lender will absorb the closing costs in exchange for a higher interest rate. Again, you’ll pay a bit more each month, and your total interest cost will be greater over the life of the loan.
Either way, your monthly payment rises slightly. You’ll pay less at the closing table, but more over the long term.
Is a no closing cost mortgage a good idea?
The answer is….it depends!
If you are a little low on cash and have found your dream home, then yes – rolling $4,000 to $8,000 into your mortgage is a good idea. It won’t increase your monthly payment by much and generally doesn’t impact qualification.
Also, if you plan on moving, selling, or refinancing in the short term, wrapping your closing costs into the balance can be a good strategy.
However, if you’re going to live in your new home for the long-term, you will pay more over the life of the loan by financing your closing costs or accepting a higher interest rate.
So if this is your forever home and you plan on keeping the mortgage for 7+ years, it’s probably best to pay the closing costs up front.