Considering a No-Cost Mortgage Loan?
Are you considering an offer for a 'no-cost' loan in lieu of a traditional mortgage? A no-cost mortgage is one on which the lender pays the borrower's settlement costs, with certain exceptions.
'No-cost' loans are generally priced at a higher interest rate than a traditional mortgage. The higher rate allows the lender to make enough money on the interest rate spread from the underwriter to pay for all your closing costs and provide them with their profit. It also has some attractive features for borrowers.
• No-cost mortgages help borrowers avoid being overcharged
• They eliminate most of the uncertainty involved in determining whether a refinance will pay.
However, the price of such loans -- as measured by the interest rate borrowers must pay to avoid refinance costs -- is unusually high. The challenge for the homebuyer is to obtain the benefits of a no-cost mortgage without paying too much.
The lender won't pay your tax escrows, homeowner's insurance or transaction taxes if there are any. You will also be stuck with paying interest on two loans for a few overlapping days. All other costs, including the mortgage broker's fee if there is one, are paid by the lender.
Don't confuse no-cost with no-cash. No-cash means the settlement costs are added to the loan balance at closing. The borrower pays them, but over time and with interest.
No-cost mortgages help borrowers avoid overcharges by reducing multiple price dimensions to one: the interest rate. Typically, in selecting a loan provider, borrowers shop for rate and points, ignoring other settlement costs.
They usually find out about these costs after they submit an application, and then they receive estimates that are subject to change. This provides lenders with ample opportunities to pad their own fees and mark up those of third parties.
No-cost mortgages also eliminate most of the uncertainty in figuring out whether a refinance will pay off. If there are refinance costs, the borrower must decide whether they are offset by the lower rate.
The outcome is that borrowers refinancing today, unless they expect to move within a few years, should pay their own settlement costs. If they have the cash, they should pay points to reduce the rate. To do this, while retaining the strategic benefit of shopping for a no-cost mortgage, follow these steps:
• Shop for the best rate for a no-cost mortgage
• Shop for the lowest points, but otherwise no-cost, at a specified rate
