No-closing cost mortgages are mortgage loans in which the borrower does not need to pay any up-front closing costs associated with purchasing a home mortgage. Closing costs often include fees for services such as property valuation or appraisal, title searches, insurance premiums, loan originations, home inspection, and other costs that come with obtaining a mortgage and closing on purchasing a piece of real property.
Overall, closing costs may involve several thousand dollars and may represent as much as 2% to 5% of the total purchase price. Thus, a no-closing cost deal can significantly reduce costs for the buyer and help sellers or lenders attract more offers.
Typically closing costs are paid on the day of closing, which is the day when the total purchase price of the property, minus the down payment, is paid to the seller, and the title to the property is transferred from the seller to the buyer.
What Are the Benefits of No-Closing Cost Mortgages?
In a no-closing cost mortgage, the real estate broker or the mortgage lender might pay the closing costs for the borrower. But it is much more likely that the buyer still pays the closing costs; they are just paid in the form of a higher interest rate on the mortgage loan than the borrower would otherwise pay. This, of course, results in a higher monthly mortgage payment.
Or, the closing costs might be added to the loan principal. So, the total loan amount is increased by the amount of the closing costs. The trade-off is that the borrower may have to pay slightly higher monthly mortgage payments.
This can benefit people who plan to live on the property for only a short period, for example, the five years that experts recommend as a minimum. That way, their overall savings from not paying closing costs will not be “eaten up” by their interest payments over the years.
A no-closing cost mortgage may also be a way for the prospective buyer who otherwise simply does not have the money to cover the closing costs that must be paid when a person buys a home. It can be challenging for some buyers to accumulate the down payment required by most lenders, which can be as high as 20% of the purchase price.
To come up with yet another 2 to 5% of the purchase price to pay closing costs might well put some people out of the market for a home purchase to their economic detriment. So, if a no-closing cost mortgage makes a home purchase possible for a person who otherwise could not afford it, then it is advantageous.
In addition, if a person does end up with a higher monthly mortgage payment because they have made use of a no-closing cost mortgage loan to buy their house, they might later be able to refinance their mortgage. If interest rates go down later in the life of their mortgage and their financial situation allows it. It is something that buyers who use a no-closing cost loan can plan for after they make their initial purchase.
What Are the Disadvantages of No-Closing Cost Mortgages?
On the other hand, buyers who plan to stay with their property longer than five years might not reap as much benefit from a no-closing cost mortgage, as the higher interest rates on a no-closing cost loan may cost more in the end than the savings from the no-closing cost arrangement. It could cost thousands more to buy a house in the end than a no-closing cost loan saves a person, depending on how many years a person makes that higher monthly mortgage payment.
Can Closing Costs Be Reduced in Other Ways?
There are ways to reduce closing costs for real instead of simply adding them to the loan principal or the interest rate. This can be done by trying to eliminate the service for which a fee must be paid. Or the fees for the services can be negotiated with the service provider.
So, a buyer might shop around for a home inspector and find one whose fee is lower than that demanded by others. Likewise, a prospective buyer can negotiate loan origination fees with lenders rather than simply accepting what the lender demands.
A person could also get help in paying the closing costs from a first-time home buyer program in the state in which a person lives. In some states, these grants do not have to be repaid unless the buyer moves or refinances their mortgage. Of course, a person must be a first-time home buyer to qualify for this assistance.
If a person has served on active duty in the military, they may qualify for a Veterans Administration (VA) home mortgage loan. These loans have a limit on the closing costs that are allowed. Moreover, VA loans do not require the highest closing cost or a down payment. So, if a person can qualify for a VA home mortgage loan, it is probably advantageous to do so.
What Are Some Potential Disputes Relating to No-Closing Cost Mortgages?
Generally, no-closing-cost mortgages and real estate transactions can give rise to disputes and legal conflicts. Real estate sales transactions can also lead to various legal issues. These may include the following:
- Fraud or misrepresentation regarding closing costs transaction: For example, a lender or real estate agent may tell the borrower that there are no closing costs but then add additional charges to the overall purchase price;
- Mortgage defaults: The buyer may fall into default on their mortgage and end up in foreclosure;
- Violations of local, state, or federal real estate disclosure requirements: State law may require certain disclosures concerning property sales. For example, many states require a seller to disclose defects of which the seller is aware. Often, sellers and their agents present a property as for sale “as-is.” But state law requires the seller to disclose defects. A seller may refuse to correct defects, but a seller cannot fail to disclose them to a potential buyer. Federal law also requires a variety of disclosures in connection with real estate and mortgage transactions;
- Disputes over contract terms: The parties to a transaction may have disputes over the issue of whether a seller should make needed repairs to a property. Or, a buyer may have issues with their mortgage lender over the terms of their mortgage;
- Various other types of closing cost disputes: A buyer may want to shop around for certain services to reduce closing costs while their agent or the mortgage lender demands that certain providers be utilized.
Disputes over refinancing a no-closing cost mortgage can also arise and may involve some of the same issues as an initial mortgage loan. Legal remedies may include an award of monetary damages for the party not violating any contract involved.
Should I Hire a Lawyer for Help with My No-Closing Cost Mortgage Issue?
No-closing cost mortgages can offer advantages, but they can also have disadvantages depending on the situation. You may wish to consult a mortgage lawyer in your area if you need information and help with a no-closing cost mortgage.
Your attorney can help you in negotiating a mortgage and a purchase transaction. Your attorney can also inform you of your rights in a dispute. Also, if you need to file a legal claim, your lawyer can assist you with a lawsuit if necessary.