Is a No-Cost Mortgage Too Good to Be True?


Here is what you need to know about home loans with no closing costs.

If you’re looking to buy a new home, you probably need a mortgage to finance it. And it pays to shop with mortgage lenders to see which one comes up with the best offer. But it’s not only interest rate you should watch out when you compare the offers – keep closing costs in mind as well.

Closing costs are the various fees you pay to finalize a mortgage, and these fees vary from lender to lender. In 2020, closing costs averaged $ 5,749 nationwide, including prepaid property taxes (property taxes are often paid quarterly, so when you buy a home, you typically pay up front to cover your bill until the end of the quarter you buy. your house).

Some lenders, however, do not charge any closing costs on a mortgage loan. And as a borrower, you may be inclined to opt for a loan without these fees. But is a no-cost mortgage a good idea? Here’s why it might not be.

There is always a catch

Most things in life are not free, and that extends to mortgage closing costs. This doesn’t mean that lenders regularly advertise free mortgages and then stick a fee on you at the end. You can really avoid paying the closing costs of a loan. But avoiding closing costs doesn’t automatically mean you get a better deal.

A zero-cost mortgage is almost guaranteed to carry a higher interest rate. You will need to calculate some numbers to see what your loan will really cost you.

Suppose a lender charges you $ 5,000 in closing costs and an interest rate of 3.2% on a fixed loan of $ 200,000 over 30 years. This means that you will pay $ 865 per month for the principal and interest on this loan, and a total of $ 111,534 in interest over the entire repayment period.

Now, let’s compare that to a no-cost mortgage that waives closing costs but charges you 3.5% interest. In this case, your monthly principal and interest payments will be $ 899, which isn’t much higher than the $ 865 you would pay in our first scenario. But when we add up the interest paid over the life of that loan, it comes to $ 123,472. That’s a difference of $ 11,938. When we compare that to the $ 5,000 in avoided closing costs, we see that in the long run, this is not the best deal. This free option ends up costing around $ 7,000 more all-inclusive.

That’s not to say that a no-cost mortgage is never a good idea. You can find a lender willing to waive the fees and offer a competitive interest rate. But lenders have to make money somehow, so don’t be fooled into thinking that a no-fee mortgage is always your best bet. Ultimately, you end up paying these fees in one form or another.

A historic opportunity to potentially save thousands on your mortgage

There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.

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