How can lenders advertise a "No closing cost loan"? No matter what you’ve heard, there is no such thing as a "No Closing Cost Loan" unless you buy a home and the seller is paying ALL your fees. The typical costs a buyer can expect to pay for closing are 3 to 5% of the amount of the loan depending on your credit and the loan program you select.

When you sit and think about the cost in real dollars, do you really expect a Lender, Bank, or Broker is going to pay 3-5% of your closing costs? Not very likely unless they’re going out of business really soon! What does this mean? Usually, when you see this advertised, it does not include 3rd party fees. What are third party fees? They include; appraisal, home inspection, pest inspection, survey, Attorney (if you use one) all the title fees, all the government taxes, the filing fee, loan processing fee, courier service, over night charges, property taxes, home owner insurance and on occasion (since they are provided by third parties), credit report, wire transfer fee and flood certification.

Really, they can include whatever is not a fee charged by them. So, in the future be skeptical about any "No Closing Cost" offer and get specific details on what is actually paid! Sometimes, you can get lucky and have a lender, broker, or banker that does title in house and as a result they may indeed cover some of the title fees. But don’t expect they will cover more than they need to in order to meet their minimal obligation to close your loan and still maximize their profit. Yes, you will indeed typically pay a much higher rate of interest for this type of loan, so do your homework because typically when you see the words "No Closing Costs" advertised with a Lender/Broker/Banker, it’s code for "We’re going to sell you right into a higher interest rate and more profit for us for you having the privilege of us waiving a few hundred dollars in fees for you."

How can they advertise such a thing? The lender is simply increasing the interest rate to absorb these costs. In most cases you are better off paying these costs at closing once than paying interest on these costs for the duration of the loan, 5, 10, 15, or 30 years.

You’ve heard that old phrase, "Pay now or pay later." No Closing Cost loans are exactly like that. Technically, there is no such thing as a "No Cost" loan and this designation is, in fact, expressly forbidden to be used in advertising by the California Department of Real Estate. Those costs don’t go away; they are paid for by the lender. A typical "No Closing Cost Loan" is 3/4% to 1% higher than loans with standard fees. A "No Closing Cost Loan" may make sense, depending upon your circumstances, but as you can see, understanding the trade-off is extremely important.

No-cost" mortgages are usually a bad deal for borrowers. Why?" Borrowers usually pay too much for "no-cost" loans, which are poorly priced for cash short borrowers. Most borrowers also don’t know how to shop for them. Borrowers pay for a "No-Cost" loan by accepting a higher interest rate than they would if they paid points. Points are upfront fees. Each point is 1% of the loan amount.

Some borrowers elect "No-Cost" loans for two reasons. They are either short of cash, or they don’t expect to have the mortgage very long. Borrowers in the second group minimize their upfront costs because they expect to pay the high rate for only a short period. The following factors need to be considered:

As you can see there is no clear cut rule. It is best to give me a call and let’s see which loan program will benefit you the most.

Andre Plessis