We often hear about lenders and banks offering “No Closing Costs” mortgages that are supposed to save homebuyers money. But does it in fact save borrowers money and is this option in the home buyers best interest? The short answer is it depends on the home buyer. Let us explain below:
All home loans regardless of loan program type ( FHA, VA, Conventional, USDA) will have closing costs associated with them. These closing costs (regardless of the lender, bank or broker) will generally range around 3% of the total home purchase price. Keep in mind the majority of the closing costs don’t have anything to do with the lender as a lot of the costs are related to government taxes, doc stamps, title-related fees, appraiser, inspector, surveyor, and the list goes on.
What some lenders can do is offer to pay all buyers closing costs – which looks great on the surface. However, we all know things are rarely free in this world and the lenders are often accomplishing this by increasing the loans interest rate. Lenders make more money through higher tiered pricing and rates. As a result, this extra spread can be used to assist the buyer through lender paid closing costs.
- Option #1 – Buyer purchases a home for $150,000 and the closing costs are $5,000. The current interest rate is 3.5%.
- Option #2 – The buyer can take a “no closing costs” option and pay $0 closing costs. All costs in this case are paid by the lender. However, their loan interest rate is higher at 3.875%
In the end the no costs option reduces the buyers out of pocket costs, but they pay more in the long run though a higher interest rate on their home loan.
Now let’s be clear, this may not be a bad thing for all buyers, especially for first time homebuyers that have limited cash on hand. Let’s say you purchase a home with a 3.5% FHA loan, closing costs are an additional 3% on top of the required down payment. However, you only have enough money to cover the down payment of 3.5% – the no closing cost option may be a good idea in this case. Again, it’s all based on your circumstance.
Buyers should note a few things:
- Avoid the no closing costs option if you have money to pay your pay own closing costs. Take the lower interest rate.
- Remember that most loan programs today allow for the home seller to pay all buyers closing costs – FHA, USDA, VA loans. If money is tight, try to submit a higher offer price and get your closing costs paid by the home seller as part of the contract negotiations.
- No closing cost options are not anything special or “exclusive” to certain lenders. Nearly every lender, bank or broker can offer this option for both purchase and refinance loans.
- Always compare apples to apples. If your lender claims their no closing costs loan has the same rates, just compare.
Homebuyers in Florida are always encouraged to contact FHA Mortgage Source with any questions about closing costs or a new pre-approval. Homebuyers in Orlando, Jacksonville, Tampa, Lakeland, Ocala, Gainesville, Tallahassee, Pensacola, Miami FL – Please reach out to us by calling 800-743-7556 or just send in the quick Info Request Form.