Compare A No-cost Versus Traditional Mortgage
The term “no-cost mortgage” is a bit deceptive. When you take out one of these loans, the lender pays the closing fees, but the buyer pays a higher interest rate for the loan. If you’re short of funds up front, this type of loan is one way to creatively finance your home.
“No-cost” is another term for negative points. Points are estimated to be worth roughly one percent of the total loan amount. Points are offset by higher interest rates. When the interest rate reaches a certain level, you actually achieve a negative point balance. This negative balance is credited toward settlement costs during closing.
Some costs are not included in a “no-cost” mortgage. For example, the interest from the closing date to the first day of the next month is not covered. Escrow costs for taxes and insurance are not covered. Homeowners insurance and transfer of title fees are also not exempt from the fees waived with a “no-cost” loan. If you’re not certain which costs are covered, it’s important to ask your lender before you sign anything.
If you want to get a general idea of the difference in cost between a “no-cost” loan and a traditional loan, you can plug your data into an online mortgage calculator. When searching for a calculator, look for one that accounts for closing costs such as lender fees, credit reports, appraisal, title insurance, origination fees, discount points, and document preparation fees. Once you enter all the information, you receive comparative analysis, which is quite helpful in determining the type of loan that will save you the most money over the course of your loan.