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Published: Dec 22, 2023 9 min read

Aside from the down payment, your mortgage closing costs — typically due on the date the home sale is finalized — are likely going to be the largest expense as part of the homebuying process.

One popular way homebuyers seek to avoid shelling out thousands of dollars upfront at closing is through no-closing-cost mortgages. These arrangements, offered by mortgage lenders, help borrowers avoid that scenario, but they almost always end up costing more money in the long run compared to paying the closing costs upfront.

Still, no-closing-cost mortgages may be worth considering in certain circumstances. Our guide will help you better understand what they are, how they work and their pros and cons.

Table of contents

What is a no-closing-cost mortgage?

A no-closing-cost mortgage is an arrangement with your mortgage lender where you don’t have to pay your closing costs at the time of closing. (Lenders sometimes offer this for mortgage refinancing, too.) But the name is a misnomer because you will ultimately have to pay those closing costs one way or another, just not upfront and all at once.

Still, a no-closing-cost mortgage can help you manage the various fees associated with closing on a home, which can run thousands or even tens of thousands of dollars depending on your area.

Typical mortgage closing costs

Mortgage closing costs are a smorgasbord of expenses going to various entities including your local government, your mortgage lender, insurance companies, real estate agents and/or attorneys, and others.

Here’s a quick sample of some of the closing costs you may have to pay:

  • Application fees, plus processing, underwriting or origination fees for your mortgage loan
  • Fees for pulling your credit reports and checking your credit scores
  • Prepaid interest covering the period between your closing date and first mortgage payment
  • Insurance premiums and administrative fees related to title insurance and homeowners insurance
  • Property taxes and recording fees to local government
  • Home appraisal fees and other costs related to pest inspection or flood determination
  • Other expenses include prepaid escrow fees, attorney fees and title search fees

In total, these closing costs tend to run between 2% and 5% of the home’s price. (In some cases, that amount may even exceed your down payment.)

According to the real estate data firm CoreLogic, average closing costs were just under $7,000 nationwide in 2021. However, they can range greatly from as much as $30,000 in Washington, D.C., to as little as $2,000 in Missouri.

Mortgage lenders are legally required to estimate your closing costs (among other mortgage-related details). That comes first on a loan estimate form while you are shopping around for lenders and then again, in more detail, in what’s called a closing disclosure form that must be provided to you at least three days before the settlement date.

How no-closing-cost mortgages work

As mentioned above, you will still have to pay closing costs with a no-closing-cost loan. The key difference with this type of mortgage is when.

With typical mortgages, you pay the closing costs upfront on the settlement date mentioned on your closing disclosure form — alongside but separately from your down payment.

With a no-closing-cost mortgage, you won't need as much money upfront. Instead, your lender essentially bakes the various closing fees into your loan term in one of two ways: either it waives your closing costs while raising your mortgage interest rate — usually by 0.5% or so — or it tacks the closing costs onto the total loan amount.

Both cases will likely result in a higher monthly payment, and you will end up paying far more over the life of the loan.

Advantages of no-closing-cost mortgages

  • Reducing your upfront homebuying costs: One of the largest financial hurdles to homeownership is the steep out-of-pocket expenses. Saving for a down payment is hard enough for many homebuyers — additional closing costs of up to 5% put homes further out of reach. A no-closing-cost mortgage at least removes one of those major barriers.
  • Improving cash on-hand for other expenses: If you drain all your savings to come up with the “cash to close” amount (aka closing costs plus the down payment) on your new home, you risk becoming “cash poor,” meaning you may have decent equity in your home but not enough money left over to cover emergency expenses or repairs. Even though they’re more expensive in the long-term, a no-closing-cost mortgage can allow you to keep some of your savings on hand for such expenses.
  • Potentially affording a larger down payment: With the freed up money on hand from a no-closing-cost mortgage, you may choose to put that toward a bigger down payment on the home, potentially getting rid of the need for private mortgage insurance (PMI) and increasing your home equity.

Disadvantages of no-closing-cost mortgages

  • Paying more long-term via higher interest rate or principal: A no-closing-cost mortgage may seem like a boon now, but consider how the costs add up long-term. Current mortgage rates have been hovering above 6.5% while median home prices are about $430,000. Let’s say you put down 20%, and your mortgage payments (excluding taxes, fees, etc.) are $2,177. A 0.5% percentage point increase to 7% due to a no-closing-cost mortgage would raise your monthly payments to $2,291 — an increase of $114 per month or a whopping $41,040 over a 30-year, fixed rate mortgage, according to Money’s mortgage calculator. (As a refresher, average upfront closing costs are around $7,000.)
  • Possibly less equity in your home: If your closing costs are rolled into your mortgage and your loan balance is larger as a result, you will start out with less equity in your home and skew your loan-to-value ratio. (And if you don’t have 20% equity in your home at the outset, your lender will likely require that you buy private mortgage insurance.)
  • Fewer options for mortgage lenders: Not all lenders offer no-closing-cost mortgage loan options. So if you are 100% set on this type of mortgage, you will have fewer lenders to compare and likely a little less room to negotiate other fees. (Some lenders may have low-cost-closing mortgages instead. Same idea, but the closing costs are capped at, say, $500.)

No-closing-cost mortgage FAQs

Who offers no-closing-cost mortgage loans?

Only some mortgage lenders offer no-closing-cost home loans. Bank of America, ThirdFederal Bank and PNC Bank, for example, all have no-closing cost mortgage programs, as do several credit unions.

Are closing costs included in mortgage loans?

Not automatically. Most lenders expect the closing costs to be due at the settlement date along with your down payment. No-closing-cost mortgages, which may fold all the closing costs into the loan, are the exception.

What if I can’t afford closing costs?

If you can’t afford closing costs, you have several options. A no-closing-cost mortgage is only one of them. Alternatively, you can find similar low-closing-cost mortgage loans that cap closing costs or try negotiating with the seller to cover some or all of your closing costs. If you qualify, you could also apply for homeownership-assistance programs in your area that help first-time homebuyers cover down payments and/or closing costs, usually for single-family homes.

Summary of Money's guide to no-closing-cost mortgages

  • No-closing-cost mortgages may help cash-strapped homebuyers afford a home by lowering the amount of money that’s required upfront to purchase a home.
  • The name is misleading because you’re still paying for the closing costs, just in a different manner: either in the form of a higher mortgage interest rate or the closing costs simply added to your loan balance.
  • When paid upfront, closing costs run about 2% to 5% of the home purchase price, with the national average around $7,000. Over the life of a 30-year loan with the no-closing-cost option, you may end up paying far more than that — upwards of $40,000 over the life of the loan, assuming you don’t refinance or sell the home before then.
  • No-closing-cost mortgages aren’t the only way to avoid steep closing costs. You have other options, such as closing-cost assistance programs and negotiating with the seller to cover some or all of your closing costs.