Home Loan Resources

No Cost Mortgages:

A new buzz word that I am hearing a lot about from people seeking a home loan is the “No Cost Mortgage”.  It seems that mortgage companies have started a new marketing twist to an existing product. I am seeing ads about no cost refinances and no closing cost mortgages.  Although there is some truth to these claims, you will find that there is always a cost involved with these transactions, it is just how the cost is applied.

Typical closing costs involved with a home loan transaction may include an appraisal, title insurance, escrow/attorney fees, underwriting fees, credit report, property inspections, recording and tax service fees.  Most of these fees are third party fees; meaning that they are fees that need to paid for services that the mortgage company does not provide. 

So where does the money come from to pay these closing costs? You still pay them!  However, you do not pay them upfront.  The home loan lender fronts the money and pays these costs for you and in return they will increase your interest rate slightly to cover the costs.  That means that you are paying more per month with each payment that you send to your mortgage company.  So you aren’t really paying the closing costs at the close of the transaction, but you are paying more per month with your mortgage payment.

Let’s look at hypothetical numbers as a more detailed example; Say that you qualify for an interest rate of 6% and that the typical closing costs would be $3,000.  In order for the mortgage company to make an extra $3,000 on the home loan to cover these costs, they might raise your interest rate to 6.75%.  Depending on the dollar amount of the mortgage and the actual closing costs in your area, the increase in rate could be higher or lower.  This is just an example to explain how mortgage companies offer these programs.

You may be wondering if this is a good deal for you or a sly trick that your lender is trying to pull over on you.  Well, that would depend on your situation.  Have your loan officer show you the difference of a no cost loan and the regular version.  See how much your monthly payment differs and ask yourself how long you will have this mortgage.  If it makes sense to pay a little more per month and save the cash out of pocket then that would be the way for you.  If you plan on having the mortgage for several years with no intention of moving or refinancing, paying the costs yourself and taking the lower payment may be the best bet.

Although the no cost loans are becoming more popular and being advertised quite a bit as of late, mortgage lenders have always had this available as an option for their clients.  The key is for you to know how these mortgages work and to do the math for your scenario to make sure which option is best for you.  A good loan officer will be able to explain the options available to you to help make the decision an easy one.