Business & Finance

When to Choose or Avoid No Closing Costs

Pros and Cons of No Closing Costs

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The previous page discussed the basics of no closing cost loans. Now, let's review then they're a good idea and when they aren't.

When Choosing No Closing Costs is a Good Idea

No closing cost loans are not necessarily bad. They are the right choice in some cases. Of course, it’s nice to get a loan done without writing a big check, but that should not be your greatest concern. Consider no closing costs when:

Rates are high and you expect them to go lower soon
You’ll only keep the loan for a few years

In general, it makes more sense to use a no closing cost loan if you’ll refinance the loan or pay (by selling your home, for example) it off relatively soon. This is because you only pay the higher interest rate for a short time, and you avoid repeatedly paying closing costs.

When Choosing No Closing Costs is a Bad Idea

You should sometimes avoid no closing cost loans. Although it hurts to pay the costs up front, you may be setting yourself up nicely for the long term. Think about the big picture when you evaluate no closing cost loans.

You should generally avoid no closing cost loans when:

Rates are relatively low, and you expect them to rise
You’ll keep the loan for many years
You can afford to buy the cheapest rate possible

No closing cost loans end up being more expensive if you keep them for a long time. The reason is that you pay a higher interest rate, and you keep on paying that higher rate for years and years. If you can get the closing costs out of the way and lock in a low rate, you’ll benefit over the long term.

How to Get the Best No Closing Cost Loan

If you’re interested in no closing cost loans, be sure to consider all the factors. Then, shop around.

You can often get a variety of quotes from the same broker - some of them might be no closing cost loans and others with different levels of closing costs. With the options in front of you, you’ll see that you can find a level of costs that’s acceptable to you.

You should comparison shop as well. Ask several mortgage brokers as well as your bank or credit union for quotes. You’ll find that they structure closing costs differently, and you can compare how things change if you choose to have no closing costs.

Closing costs are complex, and no closing cost loans are not always the cheapest. Make sure you understand how closing costs work before pulling the trigger.