What Is A “Zero Closing Cost” Mortgage?

A “Zero Closing Cost” mortgages is exactly what it sounds like — a mortgage for which the borrower pays no closing costs.  This loan allows the option to refinance to a lower rate or shorter term without incurring closing costs that increase the mortgage balance or require large out of pocket expenses. Although this loan option is also available for purchase loans it is much less common. This option is available on Conventional, FHA and VA loan types. With 30 yr and 15 yr fixed rates as well as some ARM options.
Zero closing costs are available based on the following principal. The lower your mortgage rate is the higher your closing costs are and inversely with a higher rate the lower your closing costs are. Most people are aware of the idea that you can buy the interest rate down by paying”discount points”. This is the same principal in reverse.
Loans with discount points get lower rates so, in other words, you pay additional closing costs in order to get a lower mortgage rate. This is the opposite of how zero-closing-cost mortgages work. With zero-closing-cost mortgages, you pay no closing costs and get a higher rate.
When you opt for a zero-closing-cost mortgage, you’re voluntarily accepting a higher interest rate in exchange for having your closing costs eliminated in full. The trade-off for paying no closing costs is that your higher mortgage rate carries higher mortgage payments each month. The benefit is that you brought nothing to closing and/or kept your loan balance the same.


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