“No Closing Cost” vs. “No Cash to Close”
Why they are not the same
If you choose a “No Closing Cost” loan from a lender, you will pay a slightly higher interest rate so that the lender will pay these fees for you.
Choosing the “No Closing Cost” option pays all closing costs (fees for origination, underwriting, credit report, flood certification, appraisal, attorney, title insurance, recording fees, etc.) on your behalf. However, there may still be some out of pocket funds required at closing.
These fees would be the prepaid fees money collected by the lender to be used on your behalf, such as escrow setup fees, interim interest charges and the first year’s homeowner insurance policy premium.
A “No Cash to Close” normally applies to a refinance transaction and can be done one of two ways. You can choose to pay a slightly higher interest rate so that the lender will pay both closing costs and prepaid fees for you, leaving your new loan to be equal to the existing loan payoff. Or, on refinance transactions, you may be able to receive the lender’s lowest rate available and “roll in” the closing costs and prepaid fees into the new loan balance
The option best suited for you will depend on how long you will remain in the new loan.
If you are buying a house
If coming up with the down payment is tight, you may want to consider our “No Cash to Close” option. This will reduce the amount of money you will need to bring to closing to just your required down payment. This is a combination of our “No Closing Cost” loan with a slightly higher interest rate so the lender will pay your prepaid fees and also invoices for you home inspection, survey, pest inspection, etc.
You may also choose to request that the seller pay money to be used toward your closing expenses but this must be negotiated and agreed to in your sales contract.
If you are refinancing
You should know that your current escrow account does not get transferred from your existing lender to your new lender. This means you must fund a new escrow account with the amount that should be in an escrow account at this time of year.
You will receive a refund from your current lender of any funds they are holding in escrow for you. This refund usually comes within 30 days after the new loan closes.
The interim interest (interest charged from the day of closing thru the last day of the month) is collected at closing but you don’t make a mortgage payment the first of the next month. You then skip a month before making a mortgage payment.
Generally, the prepaid fees brought to closing on a “No Closing Cost” loan should be offset by the escrow refund and the money saved by skipping a house payment.
If you choose our “No Cash to Close” option, you may have the option, depending on the appraised value, to either build the funds needed at closing into your new loan balance or pay a slightly higher interest rate and have the lender pay your prepaid fees for you.
We would be happy to discuss these options with you so you can make the decision that’s best for your circumstances. At First Nations Home Mortgage, we answer questions about closing costs every day. Give us a call today!