Anytime you borrow money, somebody gets paid. The lender charges you interest, which is easy enough to understand. What about transaction costs? Does the person who connected you to the lender get a fee or commission? Are there other activities that cost money (such as credit checks, appraisals, etc)?
In many cases, yes. Especially for mortgages and other large loans. However, these loans may be advertised as no closing cost loans. If there’s no closing cost, how do the fees get paid?
No Closing Cost Loan = Higher Rate
When you use a no closing cost loan, you still pay the fees. You’ll notice that no closing cost loans have higher interest rates. Instead of paying up front in a lump sum, you pay a little bit extra over time. Depending on how long you’ll keep the loan, you might end up paying too much.
Brokers also get paid when you use a no closing cost loan. They’re not working for free. Instead, they get paid by the lender, who has a little extra money since they’re charging you a higher rate.
You can see how your payment and total interest costs change with different interest rates using our Loan Amortization Calculator.
Next, we'll review when you should and should not choose loans with no closing costs.