Points and credits let you make tradeoffs between paying more upfront or paying more in your monthly payments.
What’s right for you depends on your situation, how long you expect to be in the home, how much cash you have available for closing, and the lender's specific rates. Learn more about the tradeoffs, and what to consider when deciding which option is right for you.
You can usually shop separately for some of your closing costs.
Lenders often allow you to shop for some closing services. Comparison shopping for those services can help you save money. You’ll shop for closing services later on, once you’ve chosen a home, a mortgage loan, and a lender. But if you’re interested in a preview, learn more about shopping for closing costs.
The Annual Percentage Rate (APR) helps you compare options.
The APR is a helpful tool for comparing loan options with different interest rates and fees. It takes into account both the interest rate and fees, so you can see which loan is less expensive over the full loan term. Learn more about the APR.
You may see a "no closing cost loan" advertised, but that doesn't mean the closing costs are free.
In most cases, you still pay for the closing costs in a “no closing cost” loan. Typically, you pay in one of two ways:
- The costs are rolled into the loan, increasing the total loan amount to cover the closing costs. The larger loan means you pay more interest charges over time. In some cases, the increased loan amount can mean you pay a higher interest rate as well.
- The costs are rolled into the interest rate. The lender is providing a rebate, known as a lender credit, to cover the closing costs. You pay a higher interest rate for a loan with credits than for a loan without credits.
Either option may be a choice if you’re short on cash for closing.
Sometimes, the seller may pay some or all of your closing costs, but that doesn’t mean the closing costs are free.
You would need to negotiate directly with the seller – not the lender – for the seller to pay some of the closing costs. Depending on the particular market in your area, sellers may be more or less willing to pay for some of your closing costs. Typically, sellers might agree to pay closing costs if:
- You have agreed to pay more for the home. A seller will usually require a higher purchase price if they are paying for the buyer’s closing costs. For example, a seller might agree to sell the home for $200,000 and contribute $4,000 to your closing costs. But if you did not ask the seller to contribute to your closing costs, the seller would probably have accepted only $196,000 for the home. You’re still paying the $4,000, just as part of your loan instead of as closing costs. Be aware that in this type of situation, the home may not appraise for $200,000, which could cause problems for your loan.
- The home needs repair. If your home inspection shows that there are costly repairs that need to be made, the seller may offer to contribute to your closing costs instead of making the repairs or reducing the sales price. This reduces your costs at closing, but it doesn’t reduce your overall costs – you will need to spend the money to make the repair yourself after closing.