Is a no closing cost mortgage right for you?

In short, a no closing cost mortgage depends on your situation. It depends on a number of factors which I will discuss in this article.

Currently, due to the economic situation that we find ourselves in, a no closing cost mortgage option is tough to find and rare depending on the lender that you choose, because of that, you will have probably have to ask a number of different lenders on options they may be able to provide you.

First off, let's define a no closing cost mortgage. This is when you either purchase or refinance an existing mortgage, and all you have to bring to the closing table is yourself and some identification, the closing person will more than likely give you a pen to use. You don't write a check to the closing company, you don't give cash, nothing. This is also applicable to a no closing cost mortgage refinance.

What a no closing cost mortgage is not is where you have to pay for your closing costs, OR, your mortgage amount goes up because your closing costs are rolled into your mortgage. What I mean by that is if you have are taking out a $100,000 mortgage, your balance will still be $100,000 once the closing takes place, plus the interest for the month if you are skipping a mortgage payment.

Why am I taking the time to ensure that I define a no closing cost mortgage? Because, unfortunately, too many people, to include lenders and brokers, think that when you ask for a no closing cost mortgage, you are asking to roll your closing costs into your loan amount. This is not what I discuss on this blog. Why? Because when you do that, you are going to pay interest on the closing cost for the length of your loan. If your mortgage term is 30 years, you will then pay approximately three times the principal amount in interest therefore, potentially negating any interest savings. Granted, there are other factors to look at, for instance inflation, BUT, that is not what a no closing cost mortgage is.

If you plan on staying in your house for a good long time however, then you would actually want to pay closing costs to take advantage of the lower interest rate for a longer period of time. If however, you are like most Americans, you will probably move in short order, approximately every six years, and sell your house and buy another house. In this case, you don't want to pay closing costs because it does not make sense. Not to mention the fact that if you do sell your house, your savings will be dimished and you will probably spend more money that you would have if you had refinanced with a no closing cost mortgage. What this also allows you to do is to refinance at will if interest rates drop as they have been doing lately.

For instance, let's look at a couple of scenarios based on today's interest rates.

If you take out a 5% mortgage and pay customary closing costs, your closing costs will be approximately 2% of the loan amount depending on where you live. Based on a $200,000 mortgage, you are looking at the following numbers:

Year	1	2	3	4	5
Closing Costs	$4,000	$4,000	$4,000	$4,000	$4,000
Payment	$1,073.64	$1,073.64	$1,073.64	$1,073.64	$1,073.64
Total Interest Paid	$9,932.99	$19,715.01	$29,338.35	$38,794.87	$48,076.06
Total Cost	$13,932.99	$23,715.01	$33,338.35	$42,794.87	$52,076.06

If however, you don't move, or if you take a mortgage with no closing costs, the interest rate averages approximately 0.5% more than if you were paying closing costs. Based on a 5.5% interest rate, your costs will break down as follows:

Year	1	2	3	4	5
Closing Costs	$0	$0	$0	$0	$0
Payment	$1,135.58	$1,135.58	$1,135.58	$1,135.58	$1,135.58
Total Interest Paid	$10,932.76	$21,713.54	$32,333.78	$42,784.42	$53,055.89
Total Cost	$10,932.76	$21,713.54	$32,333.78	$42,784.42	$53,055.89

Using our skills of deduction, we can see that the no closing cost option wins out until sometime during year five as the interest paid column is your total cost paid at the end of that particular year.

Seeing how we Americans move every six years, it’s a toss up in regards to taking a no closing cost mortgage option or paying closing costs. During year six, paying closing costs overtakes the no closing cost option by approximately $2,000, not a figure to sneeze at in my opinion. You do also however have to take into account how that $2,000 is worth less due to inflation and how you could potentially invest that $2,000 and make it worth much more by not paying closing cost. If you are disciplined with your money, I would argue that it would make sense to take the no closing cost option if you plan on living in the house for six years or less. If however, you will be moving in six years or less, then a no closing cost option would be the best method to finance your mortgage. This of course does not take into account a serial refinancer every time the interest rates drop and you are able to take advantage of the new lower interest rate.

Something to take note of also is the fact that as your loan matures, i.e. you’ve been making monthly payments on it for some, your loan principal will decrease. Once you get too far into the loan, your total interest expense, i.e. the amount of interest you will have paid on your mortgage will be more than if you had kept the original mortgage in place. If you are however unphased by that, because it can be in the thousands of dollars, then go with the no closing cost mortgage option. For me, I will refinance because it helps with the cash flow and doesn’t cost me anything other than some time to sign the closing documents.

The biggest determinant to decide on whether to go with a no closing cost mortgage option versus paying closing costs is to look at how likely you are to be in your house for six years or longer. Once that is figured out, you should then be able to figure out if the no cost mortgage is the best way to go.