Ask the expert: No closing costs?

My husband is being transferred to another city for five years. We are going to sell our house and we are excited to buy in the new city. However, we will be somewhat cash strapped. I’ve heard it is possible to get a no closing cost mortgage. How do they work?

The bottom line is that you still pay for a no closing cost mortgage. The difference is that the fees, which can total thousands of dollars, are wrapped up in the home loan.

Closing costs include such charges as the loan origination fee, appraisal, title search fees and title insurance premiums. You’ll find these vary between states.

On a $200,000 loan these service fees can amount to more than $2,000.

However, as you might imagine, getting a loan with no closing costs won’t be free. Usually the lender will offer you a loan with a slightly higher rate to account for these costs. For example, you might be offered a 4.39 percent rate on a 30-year fixed or a 4.765 rate for a no closing cost loan.

Luckily, you are looking at a 5-year horizon and if you plan to sell at that time, it can make sense to wrap the closing costs into the loan. It usually takes more than five years to recoup the costs of closing costs if you were to pay cash.

What doesn’t make sense is wrapping costs up in a mortgage and keeping the mortgage for more than five years. Then the difference will be much more expensive. Be sure to calculate the extra money it costs you to wrap the costs into the mortgage. If it is $50/month, for example, in five years you will pay $3,000 extra. That might be close to the closing cost amount. If you sell in five years, you will break even on the closing costs. But, suppose you like the area you move to and decide to stay? You will be paying $18,000 over the life of the mortgage — a hit you might not like to take.