Don’t let the name fool you: No-closing-costs mortgages don’t relieve you of any of the charges associated with closing on a home or refinancing. They merely shift the burden of payment associated with closing costs from the front end of the loan, spreading it across the life of your mortgage, as your lender recoups the cost through a higher interest rate. Still, that shift can provide advantages.
Bigger Down Payment
For many home buyers, scraping up a pile of cash big enough to serve as a down payment is the highest hurdle to homeownership. Closing costs can divert a big chunk of change away from your down payment: The average closing costs on a $200,000 home in 2012 were $3,754, according to Bankrate.com. Funneling those funds to your down payment will help you leverage a bigger house: Adding $3,754 to the $20,000 you have already set aside for a 10 percent down payment will qualify you for a $237,000 home rather than one priced at $200,000.
Shorter Break-Even Point
If you’re refinancing your home with a mortgage with closing costs, your lower monthly payment won’t really start saving you money until you reach the the break-even point -- the point at which you have recouped the closing costs. For example, if you spend $4,000 in closing costs to lower your monthly mortgage payment by $200, you will have to make 20 payments -- $4,000 divded by $200 -- before you see any bottom-line savings on the refinance. Because of this, mortgages without closing costs tend to pay off better for homeowners who don’t plan to own the house for more than five years.
No Hidden Fees
Unless you’ve gone through a mortgage closing, you may not even be thinking about closing costs when you shop for a mortgage. It’s easy to pay attention to the basics -- interest rates and points -- when you compare mortgages. Because of this, some lenders reduce their rates and recoup their expenses by tacking on closing costs. When you shop for mortgages without closing costs, lenders have no flexibility. They must quote you a rate that completely represents their costs.
Hit the Ground Running
If you don’t plan to use funds saved from a no-closing-cost loan to beef up your down payment, you can divert them into other costs associated with your new home. Many home buyers move into a home with several home-improvement projects on their to-do list. Want to swap out carpet in living room? No problem: Just tap cash saved from closing costs. Money otherwise budgeted for closing costs can also be used for home furnishings or accessories.
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