Does a No-Closing Cost Loan Exist
Does a No-Closing Cost Loan Exist?
The simple answer is Yes. They do exist. The bigger question is whether you should do one or not. No- closing cost loans are a great selling point for a Mortgage Professional over the phone since most callers first question is “Are there any closing costs?”. With this type of loan it surprises many callers that are expecting the usual answer “Yes, there are closing costs.”. We will break down the No-Closing Cost loan option further in this article.
“A No-Closing Cost Loan can only exist in one dimension, make money another way. Instead of a Mortgage Loan making money on the closing costs it will make money on the loan in other ways. Perhaps through a higher interest rate.”
One of the most popular ways is through a higher interest rate. The ways a bank or lender makes money through an interest rate is simple. They collect interest from the rate over period of time and in some cases will sell the debt on the Secondary Market. Since the rate is higher it also means that the risk is higher as well. To an investor this means the rewards are simultaneously higher. These higher rate mortgage loans attract investors that would purchase them off of the Secondary Market. This causes the demand for these types of loans to increase since there are not many like on the market. Over time you will see a trend of No – Closing Cost Loans increase. However, a person should assume that the loan is free. The higher interest rate provides a credit that is applied towards the closing costs to clear them out. There are still closing costs but they are simply paid from the credit that the higher interest rate pays back. Closing Costs are applied to mortgage transactions because there are many departments that are involved with the closing of a loan transaction.
Each company and department that are involved with the mortgage transaction get a “piece” of the action by charging even a small fee. This small fee adds up when there are hundreds of transactions completed throughout the month.
No-Closing Cost Loans should be a personal preference, not the norm or the expected. If you would like to have a lower interest rate and pay less in the long run, a normal closing cost rolled in loan would be good. If you want to save money right away on the mortgage and not finance closing costs into the mortgage and get a slightly higher interest rate, then the No-Closing Cost loan option might be better well suited for your situation.
The Final Determination:
Before deciding one way or the other, you should have a cost analysis completed to see how long it would take to pay off the closing costs if you were to roll them into the mortgage. Determine if you will be in the home longer than this amount of time to see if it would save you more money to get a higher interest rate and have no closing costs OR get a slightly lower interest rate and finance the closing costs in.
If you have any questions, feel free to contact the HC team at any time. If we cannot answer the question that you have, we will find someone that can.
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