No Cost Mortgage - A no cost mortgage is a loan where the lender pays the closing costs. Often the lender will charge a higher rate on the loan to offset the closing costs.
No cost mortgages make more sense when you know that you will not be in your home for a very long time or when you know that you are going to have to refinance within a year or two. If you plan or intend on keeping your home for more than a couple of years and you don't intend to refinance your home mortgage loan then obtaining the lowest interest rate and payment and paying for your closing costs is usually the better option.
For a purchase money transaction, one can always negotiate with the seller to pay a portion of the closing costs. This option will give you you a lower interest rate than a lender funded no closing cost option.
No cost mortgages are marketed heavily by larger companies like Ditech, countrywide and quicken loans. Although the marketing would lead you to believe that it is a great loan product for the consumer they always fail to mention the higher interest rate the loan will have.
A no cost mortgage usually always means a higher interest rate. If you plan on only being in your home a few years before moving, taking a higher interest rate with no out of pocket cost may be a wise decision. If you plan on living in your home for 5+ years, paying your closing costs and taking a lower rate may save you thousands over the life of your loan. Be sure to ask you mortgage broker which solution makes the most sense for you and your time frame.
You should definitley consider a second opinion and compare a GFE with closing costs to a GFE offering a "no closing cost loan" to see which loan makes sense now and for the long term.
If you are considering a no cost mortgage you should ask for a Good Faith Estimate (GFE) to see if there are no costs at all or if there are just no costs from the lender.
No Cost Refi - Nowadays, it seems one cannot watch an entire news broadcast on TV without seeing a "No Cost Refinance" advertisements. What is "No Cost Refi" and is it better than mortgage home loans with traditional settlement costs?
Regardless of the type of home loans, there will always be closing costs. Title companies will always charge for their title works and county recorders will always charge recording fees. "No Cost Refi" loans are "no cost" only in the sense that these costs do not come directly out of the borrowers pocket. The costs, however, are paid indirectly with higher interest rates. In most cases, the benefits of "no cost" mortgage loans do not justify the high cost of high interest rates.
No cost refi offers from most lenders do not include taxes or insurance, such as mortgage taxes and any pending or payable property tax or homeowner's insurance bills for the near future.
No cost refi's typically come with a much higher interest rate.
The majority of no-cost refi offers are actually rather hollow, as they do not include certain substantial, variable costs associated with refinancing a mortgage. One example is title insurance, which is a variable cost billed by a third party insurance company.
There are a few situations where a "no cost" loan is truly a no cost loan. In these cases the costs associated with closing are absorbed through a higher interest rate. The higher interest rate means the lender pays the broker a higher percentage; the broker can then use a portion of that percentage to pay your closing costs in what is called a "broker credit". In these situations there is the benefit of no closing costs; however the down side is that the interest rate and monthly payments are generally higher.
Lenders advertising no cost refi loans are actually misleading borrowers. Many of the costs asscoiated with doing a no cost refi are in small print and borrowers won't find out until they get to the closing table.