The Truth About "No Closing Costs" Loans

When shopping around for a mortgage, a lender may offer you “no closing costs” on your loan.

The words “no closing costs” sound quite enticing as these costs can range from 2-5% of the loan amount. For a $200,000 loan, that range can be from $4,000 to $10,000 – quite a bit of money!

One thing you need to know about these types of loans, however. There’s no such thing as a free lunch. You’ll either pay for those costs yourself or you’ll pay through a higher interest rate. No bank or lender will pay these fees for you.

What are closing costs?

Closing costs are just as the name implies: the fees you’re charged in connection with obtaining your loan. These fees include:

• Origination – The fee lenders charge for arranging your loan.
• Title survey – Background check on the home’s title to ensure it’s free and clear of liens or other issues.
• Title insurance – Lenders request this insurance to protect themselves and you if it’s discovered later that the title isn’t clean.
• Attorney’s fees – What the title attorney charges to endorse a clear title and close your loan.
• Recording fee – What your local town or county charges for recording the new record.
• Underwriting fee – This fee covers the cost of the underwriter – the company that evaluates your mortgage.

Loan Refis: Closing costs “rolled in”

For people refinancing a loan, closing costs are generally rolled into the new loan. This is because people refinance to take equity out of home to pay down credit card debt, fund a college tuition, or make home improvements. 

Or, you may be underwater and are refinancing to take advantage of a lower interest rate. In this case, you aren’t taking cash out but your closing costs are still rolled into the new loan.

Home Purchases: Where closing costs come into play

In order to entice you into doing a loan application for a home purchase, a bank or lender may advertise “no closing cost” loans. This type of advertising is patently false as you will have to pay closing costs – even if the lender “waives” them.

What does this mean?
First, you will need to pay the local recording fees, escrow and insurance pre-payments. No bank will pay these fees for you as they’re non-negotiable – everyone has to pay them. (Even I had to pay them when I purchased my new home.)
Second, in order to offset the cost of the other fees, such as the appraisal fee or attorney’s fee, the lender will increase the interest rate. So you end up paying much more on the back-end.
Picture a scale – perfectly balanced. You have the loan’s interest rate on one side and your fees on the other. To keep the scale balanced, a lender offering to “waive” your fees will need to increase the interest rate in order to keep the scale balanced.

 

Tip: Look for the lowest combination of rate + fees

Generally speaking, banks charge lower fees and higher interest rates. Mortgage brokers have higher costs and lower rates. Every lender has their own scale – which is why it pays to compare apples-to-apples using your Good Faith Estimate.

One other word of advice: Be extremely wary of paying an up-front application fee or “deposit.” Some lenders will charge you $500 to $700 deposit to begin your loan application process. Don’t fall for it.

Once you change your mind and decide to go with another lender, you lose this deposit. (See my post, “Good Faith Deposit and Other Upfront Fees” for additional details.)

As always, what’s most important, when shopping for a mortgage, is choosing the right company that will deliver.

Here at Miracles Happen, we work with you every step of the way – from delivering pre-filled out forms to coming to your home for a closing. See our Customer Review page for the unvarnished truth (we let our customers do the talking and don’t change a thing they say).

And, if you’re ready to begin home shopping – give us a call. Or, simply get your no-hassle rate quote in seconds!