Does a No-Cost Loan Really Have No Closing Costs?

As you are deciding on which home loan is going to work best for your financial situation, one of the things you will need to discuss with your lender is how much you can spend on closing costs.

Understanding closing costs and how you can avoid paying them up front.

Understanding Closing Costs

“Closing costs” is a broad term that is used to describe a variety of fees that homeowners normally have to pay when they purchase a home or refinance in an existing home. A couple of items on the list of closing costs are paid by the seller, like the real estate agent commission if applicable, but primarily they fall to the buyer. It’s important to understand what they are and the ways that you might be able to avoid paying closing costs.

On average, closing costs will be about 2% to 5% of your total loan (on a $300,000 house that can be as much as $15,000). They vary by lender, although there are some things that you can expect from any lender, such as an appraisal fee and home inspection fee. You can find a full list of the most common fees here.

Paying for Closing Costs

There are a few ways you can pay for closing costs:

  • Pay them up front with a one-time cash payment
  • Fold them into the total loan (which increases your loan principal)
  • Request that the seller cover some or all of the costs

What About a No-Cost Loan?

Some lenders (like Integrity First Lending) also offer no-cost loans. These are a great option for homeowners who don’t have enough cash to pay closing costs at the time you purchase the home. A no-cost loan allows you to move forward with your home purchase right away. However, just because you don’t pay the costs in cash at closing doesn’t mean you never pay for the closing costs.

Here’s how it works:

  • You are approved for a loan through Integrity First Lending at a specific interest rate
  • Integrity First Lending issues a “rebate” at your closing to cover the costs
  • Your interest rate will be raised slightly to cover the closing cost rebate, adding a small amount to your monthly payments instead of a large lump sum of money at closing
  • You can include the broker’s commission in your rebate as part of your no-cost loan

This is a great option for homeowners who want to keep some extra cash for costs you will encounter when you move in, like landscaping, fencing, window coverings, and more. These can add up, and having more cash in your bank account to cover them can help you avoid more debt. Talk to Integrity First Lending today to learn more about this option.