No Closing Cost Mortgages

Posted on 2009-09-22, 00:48, by Emre, under Financial Services.

You used to see no closing cost mortgages advertised nearly everywhere when the money was free flowing.  There are still lenders who have a mortgage refinance with no closing cost option.  The largest lender currently is Wells Fargo with their Wells Fargo Three Step Refinance Program.

The way this works is you if you have a good credit score, sufficient income, existing equity in your house at 79.99% or greater, you will more than likely get approved.  While Wells Fargo does not actively advertise this program in my opinion, it is out there and a no closing cost mortgage is available if you fit the profile above.

While I am sure other lenders out there also offer no closing cost mortgages, they may be specific to certain geographic areas and conditions.  You have to do research for your area and see if there are any.

The easiest way to see if you are truly getting a no closing cost mortgage is by checking your interest rate, and then comparing it to the APR in you paperwork.  Both numbers should be the same.  If however, the APR is higher than the interest rate, you are being charged for closing costs and will have to pay for them.

When I say no closing cost mortgage, that is exactly what I am referring too.  I don't mean the type of mortgage in which your closing costs are rolled into your loan.  So for instance, if your current loan amount is $100,000, your refinance amount comes out to $102,000.  You are still paying for closing costs, except that because you are financing it, not only are you paying closing costs, you are also financing it and paying interest on that amount.  A simple calculation which is by no means accurate to the exact amount, means that you will pay approximately 3 times the amount in interest.  So if you finance $2,000 in closing costs, you will then pay an additional $6,000 in interest.  Paying $8,000 to refinance your mortgage is not a good idea.

Another drawback to refinancing with a no closing cost mortgage is that your total interest expense on the house will probably be higher.  Due to how mortgages are paid off, with the interest expense being mostly front loaded early in your payment schedule, you will be more interest if you are in the later years of the mortgage.  If however, you are still in the early stages of paying your mortgage, you may be able to save money via your monthly payment, as well as the total interest expense on your mortgage.

If you have a small loan amount, a no closing cost mortgage may not be available to you.  The way mortgages work is if you take a higher interest rate, the bank or lender will rebate more money to the broker/loan officer.  What they then do is share this money with you to help pay your closing costs.  Because these rebates work as percentages, if your loan amount is smaller, the bank percentages won't be able to rebate as much money back to the broker/loan officer and because they make less money on the rebates, they have to charge an even higher amount in interest to get you to the no closing cost mortgage.

Why would you want a no closing cost mortgage?  If you know that you will not be owning your house for a long period of time, less than five years time, then it is probably better to get a no closing cost mortgage.  If however, you know you will be staying in your house longer than five years, then it would be better financially to pay closing costs and get a lower interest rate.

In recap, a no closing cost mortgage is available and preferred.  If however, you are purchasing your forever house and will be living there for an extended period of time, then go with the closing costs and the lower interest rate.  If you don't know though, go with the higher interest rate and get a no closing cost mortgage.

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