4 Downsides of Loans with No Closing Costs

Paying no closing costs might sound like an ideal loan scenario; however, when examined closely, you may find it is not the loan that you prefer. No closing cost loans are never as good as they actually sound. Examine all of the options that you are presented with before going with any loan product, here are a few downsides of going with a no closing cost loan. 

1. Higher Loan Balance

The first thing that you need to realize is that there is no such thing as a loan with zero closing costs. While they might not charge you for them upfront, they are simply rolling them into the loan. Although you will not be required to pay anything out of pocket, it just makes the balance that you owe for the loan bigger.

For example, if your loan balance is $100,000 and the closing costs are $10,000, a lender will add the $10,000 to the balance for a new loan of $110,000. In effect, this makes you borrow more than you intended.

2. Higher Monthly Payment

When you get a no closing cost loan, you will undoubtedly be paying a higher monthly payment. A higher monthly payment can create stress and financial hardship. Most loan terms are amortized for 30 years, so keep in mind that the payment increase will remain in place for a very long time. Examine your closing costs to see if you can cut out any fees. In return, this will reduce your monthly payment and loan balance. You can request payment schedules from a few lenders, and then choose the loan that best fits your needs.

3. Higher Interest Rate

Another downside of going with a no closing cost loan is that you will almost always have to pay a higher interest rate as a result. Lenders have higher rates for no closing cost loan offers. In addition, you will not be paying any points. Paying points is a way to buy down the interest rate. If you have some extra cash at closing, you can buy down the interest rate and save yourself a substantial amount of money over the life of the loan. You can lower the payment and save yourself on the total amount of interest paid. With no closing cost loans, you will not be able to take advantage of this program or potential opportunity for savings.

4. Smaller Tax Deduction

One of the major benefits of buying a house is that you can deduct part of the closing costs that you pay from your taxable income. The points that you pay towards the loan can be deducted along with the mortgage interest that you pay on the loan throughout the year. If you do not pay any closing costs, you will not be able to take advantage of this deduction and save yourself some money on taxes.