A no-cost mortgage is easy to find since the terms are simple and you won’t have to pay any costs upfront. It’s a great deal, but it’s not for everyone.
The following discussion will help determine if this type of mortgage is for you.
What Exactly is a No-Cost Mortgage?
With a no-cost mortgage, lenders like Altius Group Mortgage will be the one paying for all the closing costs. Exceptions include per diem interest rate, homeowner’s insurance, title insurance, transfer taxes, and escrows for insurance and taxes. These will be set aside to ensure that you pay off your future payments.
It is different from no-cash mortgage, where the interest is compounded. A no-cost mortgage means that you don’t have to pay any closing costs. The closing costs, however, will be added to your mortgage balance so you still pay for them with a higher mortgage interest.
To illustrate, say you want a $150,000 mortgage on a fixed-rate with a term of 30 years:
- Lender 1 offers you a conventional mortgage with $2,500 in fees at 7% interest.
- Lender 2 offers you a no-cost mortgage with 7.5% interest.
With Lender 1, you’ll have to pay $2,500 of closing costs upfront and with Lender 2, you have a monthly payment of $52, minus closing costs upfront. However, after 48 months of paying off the extra interest on a no-cost mortgage, the cost will definitely exceed your original savings of $2,500. If your loan term is set for more years, you will end up paying more. Conversely, if you choose to refinance or move after three years, then you can save some money.
Why Choose a No-Cost Mortgage?
If you are a first time homebuyer requiring financing for the long haul, you should look for other mortgage options. But if you’re having difficulties covering upfront closing costs, you can choose a no-cost mortgage and have the costs waived in the form of extra interest every month. Just make sure to get a shorter loan term, even better if you plan on refinancing or moving in several years, considering that you won’t get slapped with prepayment fees.
These are only some of the things about no-cost mortgage you need to keep in mind. Consult a reliable broker and a financial advisor to come up with a sound decision.