Anytime you hear the words “no cost” it seems like it should be a good deal, right? No-cost loans are no exception, but they are not exactly the right choice for every homebuyer. Here is an overview of what a no-cost mortgage is, and who might benefit from this type of loan.
No-Cost Mortgage Loans Explained
The term no-cost loan refers to a mortgage or refinance where the lender pays for the settlement costs at the time the buyer obtains the loan and charges a higher interest rate to make up for the costs over time. Since settlement costs can add up quickly, having a mortgage lender cover these costs at closing can be helpful to some borrowers.
It’s important to note that no-cost loans are different from a situation where a mortgage lender rolls your closing costs into your overall loan balance (increasing your mortgage principle). No-cost loans do not increase the amount you will pay as a principle balance, and instead raise your interest rate slightly to cover the costs your lender will pay for you at closing.
What Are Closing Costs?
Whenever a lender provides a buyer with a mortgage loan, there are several costs incurred at the time of closing that loan: origination fees and third-party fees. They may include:
- Document preparation
- Origination points
- Title insurance
- Reconveyance fee
- Recording fee
- Processing fees
- Tax service
- Underwriting fees
- Credit report
- Attorney or settlement costs
- Postage, wire, or courier service fees
Benefits of No-Cost Loans
The biggest benefit that no-cost loans offer a homeowner or homebuyer is the ability to settle at closing or refinance your mortgage without coming up with a lot of cash all at once. These closing costs usually average between 2% and 5% of the total cost of your home loan (that’s $6,000 to $15,000 on a $300,000 home), which is a lot of cash and could be used for things like window coverings, landscaping, and other costs after you move in. Another benefit of a no-cost loan is that your actual mortgage principle will not increase, as it does when the lender finances your closing costs into the total amount of the home loan.
What Else to Know About No-Cost Loans
It is important for buyers to be aware that while they will not pay for closing costs on a refinance or new loan at closing, the lender will increase the interest rate on the loan to make up for those costs over time. For some buyers this is definitely worth it, allowing you to avoid the need for a huge sum of cash and instead pay it off slowly over time.
To find out if a no-cost loan is a good option for you when buying or refinancing, contact Integrity First Lending today.