subject: Is A No-cost Mortgage Right For You? [print this page] Is a no-cost mortgage a good idea? Is a no-cost mortgage a good idea?
Nothing is free and the same holds true with no-cost mortgages which offer no closing fees. No-cost loans do provide the consumer another choice in the world of mortgage financing. states an article on Mint Life. If qualifying for a mortgage is tight, then a no-cost loan might make sense.
But the truth is, there are closing fees and they have to be paid somehow, so that usually means a mortgage at a higher rate than you could get with a typical mortgage.
The best advice is to crunch the numbers. In a no-cost mortgage, the lender is essentially offering you a loan to cover the closing costs. So compare these types of loans to a typical loan.
Lets say you want to finance $300,000 with closing costs of $2600:
1.Discount Points: 30-year fixed rate of 3.26 percent and 1 discount point and you pay $2600 at closing.
2.No Points: 30-year fixed mortgage at 3.5 percent with no points and you pay $2600 at closing
3.No-Cost Mortgage: 30-year Fixed Mortgage at 4 percent with no closing costs.
Heres how Mint Life analyzes the differences between options 2 and 3:
The 30-year fixed mortgage at 3.5 percent contains total interest paid over the life of the loan in the amount of $184,968, so the total cost of the mortgage (computed by adding the closing costs to the interest paid over the full term) is $187,568.
With the 30-year fixed rate no-cost option at 4 percent, the total interest over the full term of the loan comes to $215,609.
The total cost difference is $28,041, or about $85 per month.
So if the closing costs are $2,600, you would actually break even in about 30 months by paying the closing costs yourself and forgoing the no-cost option.
What makes the most difference in this scenario is how long you plan to keep this mortgage says the article. Notice thats how long you keep the loan, not how long you keep the house.
If you plan on keeping the loan for:
3 years or less: A no-cost loan makes sense considering that youre going to be paying off the loan anyway.
5 to 7 years: A no-cost loan begins to look less attractive than its fee mortgage counterparts.
10 years or longer: No-cost loans take a backseat to fee mortgages.
If you are planning on refinancing, its, most likely, to get the best possible rate, and, if thats the case, then a no-cost loan is counterproductive. To get the best possible interest rate and subsequently the lowest monthly mortgage payment, consider taking out a no-points mortgage loan or a loan containing discount points, so long as the interest rate is favorable. suggest the article.
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