The infamous "no-closing-cost" mortgage. Fact or Fiction ?

More often than not, a no-closing-costs mortgage means that the bank will cover its own fees, such as processing, underwriting, and application fees, if applicable. However, buyers will still typically have to pay for the following fees at closing: title, escrow, government, and prepaids. In some cases, lenders can provide enough credit to cover the aforementioned third-party fees, but in the current buyer's market, we see this less and less.

ROCK AND A HARD PLACE

The reason why we see it less and less is that for a lender to cover closing costs, they have to either increase the interest rate (generating more bank profit to cover those costs) or cut into their profit margin. The latter rarely happens, so we typically see higher rate offerings to cover these costs. The more credit needed to cover closing costs, the higher the rate will be. If you only need a little bit of assistance, your rate will go up just slightly, while massive assistance will require a significant hike in interest rate. A higher rate means a higher payment. The more beneficial route to take is to see if the seller will pay for it because you won't have to increase your monthly payment further to get the costs covered. The downside to seller-paid closing costs is that asking the seller to credit buyer closing costs can potentially make your offer less attractive if you're competing against other offers.

There is no way around closing costs. You will either pay them, the bank will pay them, or the seller will foot the bill. If the bank pays them, the buyer could forgo the "free closing costs" and take a lower rate option with a better payment. If the seller pays them, there is a potential that your offer will be less enticing if you're in a situation with multiple bids.

ROLLING IN CLOSING COSTS

"Rolling in closing costs" is only allowed on refinances, not purchase mortgages. If the conditions are met to roll closing costs into a mortgage, it usually makes sense to do so. This enables the buyer to find a better opportunity for the cash than if it were used to pay closing costs on the mortgage. Although it will increase the mortgage balance since they are "rolled" into it, meaning your home equity is used to pay the fees, the future value of that cash in another investment is likely greater than the return it generates by paying down closing costs.