No Closing Cost Mortgages - Are They a Bad Deal?

What is it?

What's considered acceptable and appropriate is very different for everybody, therefore this question does not have a simple answer. However, there are some important aspects of this scenario that should be considered by all potential borrowers before they sign on the dotted line.

Very simply, a no-closing-cost-mortgage is one into which the lender allows the borrower to roll into the borrowed principle all of the ordinarily out-of-pocket costs associated with settlement. This concept is most attractive to first time home buyers, or buyers who have failed to set aside enough money for settlement.

When it comes time for settlement, the lender will simply increase the total amount borrowed by the total of the buyer's closing costs. Instead of the buyer directly paying all required fees, the mortgage company will pay those on his behalf.

Is this a good idea?

Most borrowers are attracted to this concept because it allows them to retain all of the money they'd saved, which would likely be better spent in another manner. It's important for the borrower to acknowledge that these additional monies added to the loan will actually cost significantly more over the course of the mortgage than if they had simply been paid with cash at closing. The mortgage interest rate will be applied to the entire balance of the loan, which will then include the closing costs.

However, despite the fact that borrowers understand this concept, the majority of them still choose to roll settlement costs into the loan because their main focus is the monthly payment; when borrowing hundreds of thousands of dollars, adding a few more over the course of 30 years results in a barely noticeable payment increase.