No Closing Cost Loan

The "No closing cost loan" (Wikipedia reference here), has been with us since the early 1990's but companies do try to launch different versions of the basic idea and claim they have a new product.

The popularity of the no closing cost loan is obviously due to the fact that a lender does not have to pay certain closing costs which can save them several thousands of dollars initially. It is unusual to find a no closing cost loan option on mortgages of less than $250,000.

Due to the unscrupulous practices being used by lenders in the recent sub-prime market scandals, consumers are becoming increasingly more aware of the finer points of home loans and are taking nothing at face value.

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Certainly the lending industry is presently in a reducing state of panic and trying to get it's house in order to boost consumer confidence. For this reason, the consumer is in a reasonably strong position provided they are in possession of relevant facts and have a basic working knowledge of the lending industry. Just make sure that the mortgage or refinance, whether involving a no closing cost loan option or not, is what you actually want. Don't be pushed into a home refinance package just because it feels good at the time.

A "No Closing Cost Home Loan" is actually a Closing Cash Saver loan or CCS. We say that just for the sake of clarity and we have used the term No Closing Cost Loan because it is widely used.

The non recurring closing costs (NRCC) for a CCS will include either all or some of the following:

Property Title
Assumption Fee
Credit Report
Appraisal
Recording, and Notary Fees
Title Insurance
Escrow Fee
Document Preparation Fee
Tax Service
Property Inspection Fees
Homeowners Assoc. Transfer Fees
Attorney's Fees
Misc. Fees (courier, underwriting, wire transfer, etc.)

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Sometimes A No Closing Cost Loan Does Not Make Financial Sense

When purchasing a property, if the seller has indicated they are going to be paying some or all of the NRCC then the buyer will want to take full advantage of these funds for their own benefit and use all the money that the seller is offering. This could involve paying for some points and/or closing fees.

When doing your Break Even comparison, (No Closing Cost Home Loan comparison is here), and you come up with a term of 3 years or less, it is vitally important to consider alternative refinancing options, other than the no closing cost loan, if the intention is to staying the property for longer than 5 years.

If you are a homeowner and are quite some ways into paying off your mortgage to the extent that you are paying off mainly principal rather than interest then careful consideration must be taken if you are thinking about refinancing. It is possible that you place yourself into a situation where you can never repay the loan so extending the refinance on the home loan term would not be a good option.

Remember that no closing cost cost loans are portrayed as being a painless method for homeowners to avoid paying NRCC's. Unfortunately, the free lunch saying is perfectly true and this particular lunch could end up costing a small fortune and create a financial tapeworm which needs feeding continuously. The interest rate is going to be at least 0.25% more than other home loan refinancing packages because your lender is not going to lose money on the deal. As a very general rule of thumb, a no closing cost loan could be beneficial if the intent is to stay in the property for less than 5 years.

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