No Cost Mortgage Loans! Is There Such a Thing?

Though many banks advertise “no-cost” mortgages, there is no such a thing. You can simply pay a higher rate to cover the closing cost or you can get a no out-of-pocket cost mortgage where closing costs are added to the loan balance if you are refinancing (which means you’ll pay interest on the closing costs).

When it comes to cost, refinancing comes with nearly as many costs as the initial mortgage. You’ll need to pay closing costs, title insurance, and other fees, and you may also have to pay for an appraisal, credit report and taxes.

Closing costs vary according to your rate. In other words, if you want the lowest available rate, your closing costs will be relatively high. Alternatively, if you accept a slightly higher rate, your closing costs will likely be reduced.

For example, a 4.5% rate may cost you $1,800 to close, while a lower rate at 4.25% might cost you $3,500. But if you accept a rate of 4.75%, you might have no out-of-pocket costs at all. In fact, the 4.75% loan may have been advertised as a “no-cost” loan. You can see, however, that you are indeed “paying” for the closing costs in the form of a higher interest rate.

If you are considering refinancing, a lower interest rate refinance, would reduce the amount you pay in interest. If you can afford it and don’t have other high interest debt, a good strategy is to direct the amount of money you save from a refinance toward extra principal payments. In this way, your monthly mortgage amount doesn’t change, but you can pay off your home much faster. In most cases, a refinance that involves removing private mortgage insurance (PMI) will also help save you money.

Generally, at least a half point to a full point reduction in the interest rate will save you enough money to cancel out the closing costs within a few years.

Remember, in a “no cost” mortgage, you are either tacking the fees onto the loan balance or accepting a higher interest rate to cover those fees. If you can afford it, you’ll save money over the long-term by paying the fees out-of-pocket. However, if you can’t afford it and plan to stay in your house for a while, adding the fees to your loan balance is likely to work out better than accepting a higher interest rate.

MR. Gallo is a licensed Mortgage Broker, NMLS 335384, that works for Southland Financial and can be reached at 818-637-2905

Post Author: Glendale City