Explore the Mortgage101 Library
Check Local Mortgage Rates
Loan Program Choices
Use our calculator to find out your estimated monthly payment in advance: Enter the loan amount, interest rate, and length of mortgage.
Try our Mortgage Payment Calculator
A No-Cost Mortgage is the mortgage loan where the closing costs are waived. This allows home buyers to save some money when you first purchase a home. The truth of the matter is that closing costs account for a significant portion of the mortgage lender's profits. If the closing costs are waived, the mortgage lender has to to earn that money some other way. This is usually accomplished by increasing interest rates and other fees. This is why any home buyers that are considering a no-cost mortgage must look at the costs and decide whether such mortgage is right for them.
Understanding No-Cost Mortgages
When a home buyer applies for a mortgage loan, the mortgage lender must spend some of it's money to prepare it. Those expenses are known as closing costs. The closing costs vary depending on the lender, and only some of them are absolutely necessary. This includes appraisal fees, attorney fees, title fees, government recording fees and pre-paid fees. In most mortgages, the home buyer pays the closing costs. But in no-cost mortgages, the lender pays those fees. However, the lender will still want to recover those fees. It just has to do it in ways that are less apparent to the home buyers.
No-Cost Mortgages and Interest Rates
Normally, the mortgage interest rates are set based on the market conditions. If the interest rates are fixed, they will be set at the time the home buyer takes the loan and remain the same until the loan is fully repaid. If the interest rates are variable, they are periodically readjusted depending on the market conditions. With the no-cost mortgage, the closing costs are split into smaller portions and added to the interest rates every month.
As the result, they home buyers wind up paying more interest than they otherwise would. Since most people don't have the time, or the know-how, to keep track of the market conditions that determine the interest rates, they have no idea that they are being overcharged. Also, the interest rates will remain higher than normal even after the home buyer pays enough interest to cover the closing costs. This means that you can ultimately wind up paying more than you would if you paid the closing costs up front.
Is No-Cost Mortgage Right for Some Home Buyers
Because of all the reasons stated above, the no-cost mortgage does not benefit home buyers who plan to live on their property for a long time. However, home buyers who want to buy a home for a shorter period of time may be able to save money. The same goes for buyers who intend to refinance after a few years. However, such buyers need to be careful with their timing. In order to successfully safe money,you must sell or refinance no later than four years after securing the loan.
However, this strategy may not necessarily pay off. If the home buyer chooses to refinance, you will have to find a loan with lower interest rates and generally better terms - something which may not necessarily be available. Furthermore, refinancing will most likely trigger the loan's penalty clause and can require additional costs. The earlier the home buyer refinances, the higher the fees will be.
- 3 Warning Signs of Loan Modification Scams
- 3 Factors that Can Negatively Affect Your Mortgage Application
- 3 Reasons Banks Reject Short Sales
- 3 Common Short Sale Mistakes
- What To Do When Mortgages Default
- Low Down Payment Loan Qualification
- FHA Eligibility with Bankruptcy and Foreclosure
- Home Equity Loans for People with Bad Credit
- Should You Refinance? Make Sure the Timing is Right