No-cost mortgage not entirely honest

There is always a fee to be paid, even on a no-cost loan

The mortgage industry, like any other, is a competitive one. Lenders want you to borrow money form them rather than from someone else. And you want to borrow your money from whomever will provide it at the best rate. After all, money is a commodity like anything else, and the cheaper you can get it, the better off you are. With that in mind, some lenders have been offering mortgages that they describe as having “no cost” or “no fees.” Is that possible? What’s the story?

Lenders make part of their money on the interest that you pay on the loan. They also make some of their money on fees, such as a loan origination fee, that they apply to the closing costs on your mortgage. But there are other fees that are typically paid at closing that aren’t all profit for the lender. Some of these fees include a title search, property appraisal and miscellaneous fees for mail, courier services and the like. Some of these fees are just expenses that need to be paid in order to make it possible to sell the house in the first place. So how does the lender charge no fees?

Generally, a no-cost or no-fee mortgage is one where the buyer is freed from having to bring a check to pay closing costs. The cost of closing on a loan can be substantial; buyers often have to bring a check an amount equal to as much as 5% of the cost of the property. But the lenders aren’t doing away with these costs, they simply add them to the loan amount. If you are borrowing $100000 and there are $3000 in costs that need to be added, the lender will turn your loan into a no-cost loan by simply lending you $103,000 instead. Or perhaps they will lend you the same $100,000 but charge you a slightly higher interest rate than they would if you paid the costs yourself.

So you aren’t really avoiding the costs. After all, the appraiser has to be paid. So does the title company and everyone else who has participated in the process that makes it possible for you to buy the property in the first place.

A no-cost loan can be a lifesaver if, for whatever reason, you simply don’t have the available cash to pay closing costs yourself. On the other hand, you will find yourself financing the costs for as long as thirty or forty years if you simply have them added to the cost of the loan. Ultimately, it really boils down to what works best for you. For many consumers, particularly those who are refinancing their homes, the ability to take out a mortgage without having to pay a substantial out of pocket fee is an important one. These people don’t mind paying the fees over time, as long as they don’t have to write a check. For others, particularly those who are frugal, the notion of paying even one extra penny in interest is one that does not appeal to them. For those buyers, the traditional loan with the fees paid at closing by the buyer is the best option.