The Truth About No Closing Costs Mortgages

You hear about them on the radio & television all day long.

"We'll do your mortgage with no closing cost!"

You think to yourself, "Hey that sounds like a good deal." But is it?

The idea of a no closing cost mortgage is nothing new. Mortgage lenders have been doing them for years. It is a perfectly legal way of doing business, so long as the borrower understands exactly what they are agreeing to. The way this works is the borrower agrees to accept a higher interest rate than they would normally qualify for in order to not have to pay any of the closing costs. The lender uses the higher rate to help pay these costs, sometimes even finances "discount points" in to the deal. The real winners in this scenario are the lenders, who are now making considerably more money off of the loan in interest and may even be making discount points. Remember to always read through your "Good Faith Estimate" of fees and all of the fine-print. All should be fully disclosed to you.

Now this strategy may be a good one for borrowers who are not going to hold that loan for very long. Landlords or real estate investors who only plan to hold a property for a year or two, might find it worth while to take the higher payment and interest rate to keep from having to pay out thousands of dollars every time they do a mortgage transaction. However for the average homeowner who may keep a loan for 5 years or more, this strategy probably won't make much financial sense.

So is a no closing cost mortgage right for you? That's up to you. If you have definite short term plans for the property that you are purchasing and you have the financial responsibility to carry out those plans, then paying no closing costs may be an option for you. However if you are buying the home that you plan to live in for awhile, then paying your closing costs and keeping your payment as low as possible will most likely make more financial sense for you. In either case always make sure that you have worked the numbers and explored all of your options so you can decide what is best for you. Just remember, there is no such thing as a free lunch. You will pay for it one way or another.

Some no closing costs loans also mention "No PMI," or "No Private Mortgage Insurance," but this is also being financed by the consumer through a higher interest-rate than the consumer could get if they paid PMI separately or by using a combo-mortgage program. Also, if the PMI is a separate payment the consumer has the ability to eventually drop this insurance from their payment and do not have to refinance to do this. PMI is also a new income tax write-off along with mortgage interest for home buyers who make less than $100,000 per year in gross income and are purchasing their primary residence.