No Cost Mortgage Attracts Cash-Short Borrowers

2007-03-08 10:33:40

( Financial )



If raising the initial money to close a mortgage is a bigger obstacle than paying monthly payments, you may find a no cost mortgage an attractive option. A mortgage may be termed no cost loan but it does not mean you’re not charged any upfront fees to originate the loan. Rather, the lender shoulders these refinancing costs in exchange for a higher mortgage interest rate.

Mortgage lenders know that excessive loan costs turn off many borrowers. And they recognize that cash-short borrowers would choose to avoid these fees if they could. Hence, lenders offer the so-called no cost mortgage. But before you get swayed to purchase a no cost mortgage, think of the possible consequences of a no cost loan.

A no cost mortgage can be a good deal if you intend to occupy your home for a short period only. Remember that lenders demand a higher interest rate because they assume that rate won’t last very long. In fact, the average life of a high interest rate loan is relatively short. Should you pay a high rate for a long time, you end up taking a bad deal.

When you shop for a no cost loan, make sure that you and the lender agree on what no cost mortgage means exactly. Most homebuyers tend to associate no cost mortgage with no-cash mortgage. In no cash mortgage, the borrower and the lender do not have to pay the settlement costs at closing; instead, the costs are added to your loan balance making you pay them with interest at a later time.

The main attraction of a no cost mortgage is that you save at closing. If you’re planning to stay in your home for just a few years, paying fewer points as a trade-off for a slightly higher interest rate usually makes good economic sense.


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