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Home buying is a complex, multi-step process. It requires dozens of decisions (large and small) and a variety of fees (also large and small). As a result, it’s easy to forget about the closing costs. A no-closing-cost mortgage lets you skip paying them upfront, but they rarely disappear.
At closing, you’ll get a bill for fees and charges such as the appraisal, title insurance, deed recording and government taxes.
LodeStar’s 2025 data show average purchase closing costs of $4,528, about 1.04% of the sale price. That figure covers title, settlement, recording and transfer-tax charges.
Maybe you can think of better uses for that money, or you simply don’t have that kind of cash lying around. If so, some lenders offer a no-closing-cost mortgage that removes these upfront costs from your closing bill.
If used wisely, this approach could save you thousands of dollars.
But in some cases, this type of mortgage could cost you more than a loan with upfront closing costs. The difference can reach thousands, or even tens of thousands, of dollars.
Here’s how to exploit the pros and avoid the cons of a no-closing-cost mortgage.
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How a No-Closing-Cost Mortgage Works
To start, never forget the adage, “There’s no such thing as a free lunch.”
This saying dates to the 19th century, when saloonkeepers would offer free lunches to anyone who bought a drink.
Obviously, the lunch wasn’t actually free, since the patron had to buy a drink to qualify.
The same principle applies to no-closing-cost mortgages. In most instances, you will cover some of the closing costs … eventually.
Typically, no-closing-cost mortgages come in two forms:
- The lender simply adds the closing costs to the mortgage principal. This allows you to spread out the closing-cost payments over the life of the loan. The drawback to this type of no-closing-cost mortgage is higher monthly payments than if you’d paid the closing costs upfront.
- The lender will give you a credit to cover the closing costs but charge you a slightly higher interest rate. The same approach works whether it’s an original mortgage or a refinancing. For example, with hypothetical rates, the lender might offer you 7.25% if you pay the closing costs upfront. If you don’t, the rate might be 7.75%. In the second scenario, the lender will usually recoup the closing costs over the long haul through the higher rate.
The key word in the last sentence is “usually.”
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A Short-Term Strategy for Borrowers
A no-closing-cost mortgage can save you money. But it does so only if you sell the house or refinance the mortgage within a few years.
Stay in the house too long (without refinancing), and the loan becomes more expensive than paying the closing costs upfront. The cause is either the higher interest rate or the higher principal from folding closing costs into the mortgage.
To use a no-closing-cost mortgage as a money-saving tool, first determine your “break-even point.” That’s the number of months it would take you to recoup the closing costs from a standard mortgage.
To calculate the break-even point, use one of the many calculators available online. You can also ask prospective lenders for an analysis of the closing costs. Have them also show the difference in interest rates and payments between a no-closing-cost loan and loans with upfront fees.
Once you identify your break-even point, compare that number to a no-closing-cost mortgage. This gives you a “timeframe of savings.”
For example, let’s say you have two choices for a $150,000, 30-year fixed mortgage. One loan has an interest rate of 7.25% with $3,500 in closing costs. The other offers a rate of 7.75%, with no closing costs.
Choosing the higher-rate, no-closing-cost mortgage would cost you an additional $51.35 a month in principal and interest. Over 30 years, that adds up to about $18,500.
On the other hand, the standard mortgage with upfront closing costs breaks even after five years and nine months.
In this case, the no-closing-cost option would only save you “real money” if you sell the house or refinance well before that five-year, nine-month mark.
Should You Risk It?
Consider a no-closing-cost mortgage that carries a higher interest rate instead of adding the closing costs to the balance. It lowers the cash you need at closing, so it could be a good option for someone who is temporarily cash poor. It could also suit someone who wants the extra money for projects such as home improvements and maintenance.
In that case, just be aware that you are making a tradeoff. You get lower upfront costs in exchange for higher monthly payments and a loan that’s more expensive in the long run.
For most borrowers, it’s probably best to opt for a standard mortgage product.
A no-closing-cost mortgage could be the most expensive “free lunch” you ever eat. Two exceptions apply. One is when you don’t have enough money to pay the upfront closing costs. The other is when you’re certain to refinance or sell the house in a couple of years.
Once in a blue moon, a lender waives the closing costs without adding them to the principal or raising the rate. However, that’s a very rare event, so don’t count on it.
