No Closing Costs

Over the past several years, a growing number of mortgage companies have started offering home loan refinancing to borrowers claiming "No Closing Costs". While there are a number of ways to reduce the expenses involved in refinancing a mortgage, it is important to note that in mortgages, as in life, there is no such thing as a "free lunch".

No closings costs loans will generally have a higher interest rate and may also carry long prepayment penalties from three to five years.

For short term loans, the no cost loan may make sense. If you plan on staying in the home for an extended period of time then a no cost loan may be more expensive in the long run.

"No Closing Costs" can mean different things to different mortgage companies. The best way to compare apples to apples, is to get a copy of the Good Faith Estimate from all potential lenders to see if any "hidden" costs will be added to your loan.

With virtually every mortgage transaction, there are some costs involved. Lenders and brokers that advertise no closing cost loans typically are paying for the closing costs out of the proceeds they receive for selling the loan to you. As a general rule, if you plan on staying in your loan for more than three years, be sure to find out what kind of loan you are eligible for that includes closing costs.

No closing costs options are most popular with second mortgages or small balance first mortgages. To decide if this is best for you, calculate your principal and interest payment at the no closing cost interest rate offered and at the standard closing cost interest rate. Take the difference in the two monthly payments and divide that into the total closing costs dollar. This will give you the number of months for the two programs to break even.

Based on the facts that it will cost you more over the life of the loan then you save by not paying closing fee's most financial experts will advise against the no closing cost option.

A no closing cost loan may make sense for one borrow and be terrible for another borrower. Get yourself a great mortgage consultant to help you understand the difference and what makes most sense for your particular situation.

There are quite a few mortgage lenders/companies out there that are offering no closing costs loans that are not really no closing costs loans. These lenders will still charge 3rd party fees such as title fees, appraisal fees, endorsement fees, etc... and they simply mean that they are not charging you any fees directly from themselves. Normal fees for a mortgage company may be processing fees, application fees, origination fees, underwriting fees, credit report fees, mortgage broker fees, etc... Make sure that you are provided a GFE, good faith estimate, and review that to get a good idea of what fees may or may not be included in your refinance or home purchase. You don't want to go through the whole process and then be surprised at the end. Therefore, make sure you receive a GFE and you ask questions about anything on there that you do not understand.

» DISCLAIMER: The information contained in this article on 'No Closing Costs' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.