A lot of Rhode Island lenders these days are offering a “no closing costs” option if you take out a mortgage. With this option, the lender pays the closing costs for you, but you pay a slightly higher interest rate on the loan.

This can be a good idea in some circumstances. But you have to run the numbers to find out if it’s right for you.

The appeal of a “no closing costs” loan is obvious: Closing costs can be expensive! The national average of closing costs for a $200,000 purchase-money mortgage is more than $4,000, according to a survey by Bankrate.com. And that figure can vary considerably by state: In New York, the most expensive state, the average total of closing costs for the same mortgage is $6,183.

On very expensive homes, it’s possible to have closing costs that are north of $10,000.

For many people who are struggling to come up with a 20% down payment, the idea of avoiding closing costs is very attractive.

On the other hand, if you accept a loan with a higher interest rate, you’ll be paying the higher rate for the entire life of the loan, which means you could be paying many thousands of dollars extra as the years go by. [Read more…]