What is a "No Cost" Loan?

Over the past few years many lenders, both brokers and banks, have used the term “no-cost loan”. In most cases this term is quite misleading. What these lenders are referring to is when the borrower pays no up front fees in order to obtain a mortgage. The borrower is actually paying these fees (title & escrow, appraisal, points, etc.) by accepting and qualifying for a higher interest rate. Many times I’ve heard the term “no-cost loan” touted as the very best mortgage that is available. The lenders advertising this are trying to convince you that anyone who charges these fees is trying to rip you off and the fees are just a way to pad the profits of The Other Guy. In the end, though, you are still paying “those fees” because you are paying a higher mortgage payment than you could have obtained.

So, why should you accept a no up front fee loan? It all comes down to a simple question: How long do you plan on keeping the mortgage? The simplest comparison is when you work for a company that transfers you through out the country every year (and doesn’t pay your closing costs), and you know that next year at this time, you will be living in Omaha. Under this circumstance, you should opt for the no up front fee loan because the lower interest rate that you could obtain by your paying the fees up front won’t be recovered by the time that you move. The reverse of this is true: you won’t ever move out of you house (or at least don’t ever plan to). In this circumstance, if you paid the fees up front, the difference of the lower mortgage payment will have equaled those fees in just a few years.

You are the only person that can answer the question. And only when you have all of your options, and costs, fully explained.

Oh, as I said, the term no cost is mostly misleading. There are some Home Equity Lines of Credit (HELOCS) that offer a true no-cost loan. You can’t pay any fees in order to lower the interest rates and payments. The lender truly pays these fees for your business.