Yes, it’s possible. Many times you can close a loan without having to pay any closing costs by locking in a slightly higher interest rate. Loans at higher rates receive a credit at the closing from the lender, which can often pay for all your closing costs. This can be a smart financial move if you don’t plan on holding the mortgage for a longer period of time (i.e. you are moving in 3-5 years).
For example, the monthly payment on a $250,000 loan, 30-year fixed at 3.25%, is $1,088. Let’s assume the closing costs come to $2,000.
Let’s also assume that the interest rate on a “no closing cost” loan is 3.375% – a monthly payment of $1,105 (Only $17 more per month).
If you go with the higher rate and keep the mortgage for five years, you would have paid $1,020 more than the loan at 3.25% over that period of time. However, you would have saved $2,000 up front. So, if you were planning to move in 5 years, the higher rate loan would have made more sense.
Before deciding on a rate, ask your loan originator for three rate quotes with closing costs:
- The lowest rate available
- The rate with no closing cost
- A rate in the middle
This way, you will be able to compare several options and determine what rate and cost structure makes the most sense for your specific situation and financial goals.