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The Mortgage Professor

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No-Cost Mortgages: Really?
In today’s volatile mortgage market, the thought of anything called a “no-cost” mortgage sounds enticing. But what are these offerings?
A good no cost mortgage most often refers to a loan that waives or pays for the borrower’s closing costs. Many borrowers are surprised when they complete their mortgage transaction by the presence of extra fees that can add up to thousands of extra dollars. These closing costs are due at the time of signing, and can be a painful addition to the process.
Closing costs include:



Any opportunity to get rid of these fees is a good one, right? But are you really getting these fees completely waived?

Tricky lenders may offer a No cost mortgage where they are actually usually just folding the closing cost fees into the rest of the loan. This means that borrowers opt out of paying fees upfront and out-of-pocket, and opt in to adding to their loan’s principal balance which leads to higher interest payments. The costs are there, and may become larger over time.

For some homeowners, this leeway at closing time is well worth it. No-cost mortgages are found in new home purchases. Far more common, however, is no-cost refinancing. In this instance, homeowners can refinance to a more favorable loan in times of lower interest rates, and escape the closing costs. In some cases (and usually in more favorable markets) homeowners can move from no-cost refinance to no-cost refinance every few years, never spending money on closing costs.

A no-cost mortgage may not make sense for people who plan to stay in their homes for more than five years. For these homeowners, the most economical method is to pay the closing costs and fees upfront to obtain a lower rate. The lower interest rate and lower principal adds up over time.  

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