That distinction is important.
At Capital Funding Mortgage, when we discuss a no closing cost loan, our objective is straightforward:
The eligible closing costs are offset by a lender credit rather than simply being added to your new mortgage balance.
That is very different from showing little or no money due at settlement because thousands of dollars of closing costs have been financed into a larger loan.
Suppose you are refinancing a mortgage and there are $6,000 of closing costs.
There are several ways those costs might be handled.
You could bring the $6,000 to settlement.
Your new mortgage would not need to increase to cover those costs, but you would be paying them directly from your own funds.
Another option is to increase the new mortgage balance by approximately $6,000 so the closing costs are financed into the new loan.
You may bring little or no money to settlement.
But that does not mean there were no closing costs.
The costs still existed.
You simply borrowed additional money to pay them.
You will then generally pay interest on that additional loan balance for as long as that portion of the mortgage remains outstanding.
This is the structure we generally mean when discussing a true no-closing-cost mortgage.
The closing costs still appear on the Loan Estimate and Closing Disclosure, but an offsetting lender credit is provided to pay the eligible costs.
The Consumer Financial Protection Bureau recognizes this type of structure as a “no-cost” loan when a lender credit or rebate offsets some or all of the closing costs.
The important difference is that the closing costs are not simply being added to your mortgage balance.
Assume you currently owe:
Existing mortgage payoff: $350,000
And assume the new loan has:
Eligible closing costs: $5,000
If the $5,000 is added to the mortgage:
New loan amount: approximately $355,000
You did not write a check for those costs at settlement, but you still paid them by increasing your debt.
If Capital Funding Mortgage structures the transaction with a sufficient lender credit:
Existing payoff: $350,000
Eligible closing costs: $5,000
Lender credit: $5,000
The lender credit offsets those eligible costs instead of simply increasing the mortgage balance by $5,000 to pay them.
That is a very important distinction when comparing refinance proposals.
This is one of the areas where homeowners can become confused.
A mortgage proposal might say:
“No money out of pocket.”
That statement by itself does not tell you how the costs are being paid.
The costs might be:
These structures can produce very different financial results.
When comparing mortgage offers, do not simply ask:
“How much money do I need at closing?”
Also ask:
“What is my new loan amount, and exactly who is paying the closing costs?”
Mortgage rates generally have different pricing options.
A borrower may sometimes choose:
With a lender-credit structure, the lender provides a credit that offsets eligible closing costs.
The CFPB explains that lender credits reduce upfront closing costs and are typically provided in exchange for a higher interest rate than the borrower would receive on the same type of loan without the credit.
The lender credit should appear on your Loan Estimate and Closing Disclosure so you can see exactly how the transaction is structured.
No.
We do not believe every borrower should automatically choose the no-closing-cost option.
The correct decision depends upon the numbers.
For example, we may compare:
Option A — Lower Rate + Closing Costs
versus
Option B — Slightly Higher Rate + Lender Credit Paying the Closing Costs
The lower-rate loan may eventually produce greater savings if you keep the mortgage for many years.
However, it could take several years for the monthly payment savings to recover the closing costs you paid upfront.
That period is known as the break-even period.
If you sell the home or refinance again before reaching that break-even point, paying substantial upfront costs for the lower rate may not have been the better financial decision.
Suppose one mortgage costs you $6,000 at closing but saves you $100 per month compared with a no-closing-cost alternative.
A simplified break-even calculation would be:
$6,000 ÷ $100 = 60 months
That is approximately five years.
If you expect to keep that mortgage much longer than five years, paying the costs to obtain the lower payment could potentially make sense.
But if you refinance or sell in two or three years, the lender-credit option might produce the better result.
That is why we believe a refinance should be evaluated based upon more than the advertised interest rate.
Depending upon the transaction and available lender credit, the credit may be used to offset eligible closing costs such as:
The exact costs and available lender credit vary from transaction to transaction.
A lender credit is shown separately on the mortgage disclosures and reduces the closing costs that would otherwise be paid by the borrower.
This distinction is very important.
When we refer to a no closing cost mortgage, we are generally referring to the actual costs associated with obtaining and closing the mortgage.
There may still be amounts associated with the transaction that are not really loan closing costs.
These can include:
For example, if you establish a new escrow account, the lender may need to collect money at settlement so there will be sufficient funds available to pay future property tax and insurance bills.
Those funds are not lender profit or a fee for obtaining the mortgage.
They are your own funds being placed into an escrow account for future expenses.
The CFPB separately identifies prepaid expenses and initial escrow deposits on the Closing Disclosure.
If your existing mortgage has an escrow account, your current mortgage servicer will normally return the remaining escrow balance to you after the old mortgage is paid off, subject to the servicer's normal processing.
Meanwhile, the new lender may establish a new escrow account at settlement.
This can temporarily make the amount required for the new escrow account look like another closing expense.
But the important distinction is that escrow funds are fundamentally different from lender fees, title charges, appraisal expenses, and other costs of obtaining the mortgage.
One of the easiest ways to understand a refinance proposal is to look carefully at the new loan amount.
If you owe approximately $350,000 but the new mortgage is $357,000, ask:
“Why is my new mortgage $7,000 higher than my existing payoff?”
There may be a legitimate reason.
Perhaps the borrower intentionally requested cash out.
Perhaps prepaid expenses or other amounts are being included.
But if the difference represents closing costs that have simply been rolled into the mortgage, the borrower should understand that.
A loan does not become “no cost” merely because the borrower does not write a check at settlement.
At Capital Funding Mortgage, we believe mortgage comparisons should be transparent.
When evaluating a refinance, we can show you:
Your existing mortgage payoff
The proposed new mortgage amount
The interest rate
The lender credit
The actual closing costs
The estimated monthly payment
The monthly savings
The break-even period
The remaining term on your existing mortgage
The term of the proposed new mortgage
That makes it much easier to determine whether the refinance actually improves your financial position.
A lender may advertise an extremely attractive interest rate.
But if obtaining that rate requires thousands of dollars in points and closing costs, it may or may not be the best choice.
Another mortgage may carry a slightly higher rate but generate enough lender credit to eliminate eligible closing costs.
Which is better?
That depends upon:
The correct comparison is not simply:
“Which lender quoted the lowest rate?”
The better question is:
“Which mortgage gives me the best financial result for what I am trying to accomplish?”
When we describe a loan as a no closing cost refinance, we want you to understand exactly how the transaction works.
Our goal is not to disguise closing costs by simply increasing your new mortgage balance.
When available and appropriate, we structure the mortgage so that a lender credit offsets the eligible closing costs.
You can then see the credit directly on your mortgage disclosures and understand where the money is coming from.
There is still a tradeoff: the interest rate associated with a lender-credit option may be higher than a rate for which you pay closing costs or discount points.
We believe that tradeoff should be shown to you clearly so you can decide which option makes the most financial sense.
If you have received a refinance proposal from another lender, we would be happy to help you review it.
We can compare:
If a lender is telling you that the mortgage has “no closing costs,” one of the first things we will look at is whether those costs are actually being paid through a lender credit or whether they have simply been added to your new mortgage balance.
A refinance can look attractive on the surface and still fail to provide the financial benefit you expect.
Before replacing your current mortgage, let us compare the entire transaction.
John Madden
Owner, Capital Funding Mortgage
41 University Drive, Suite 400 #475
Newtown, PA 18940
Office: (855) 580-5626
John's Cell: (215) 601-6724
Email:info@capitalfundingmortgage.com
Website:www.capitalfundingmortgage.com
NMLS #960139
Serving homeowners and homebuyers throughout Pennsylvania and New Jersey.
Loan programs, interest rates, pricing and lender credits are subject to change and borrower qualification. A lender-credit mortgage may carry a higher interest rate than an otherwise comparable loan without lender credits. “No closing cost” refers to eligible closing costs being offset by available lender credits and does not necessarily eliminate prepaid interest, escrow deposits, property taxes, homeowners insurance or other amounts associated with the transaction.
