One of the reasons that may be keeping you from becoming a home owner is the large closing cost that comes with taking out a mortgage loan. Between all the fees that you have to pay when closing on a mortgage loan, you will end up paying several thousand before you even start making monthly mortgage payments. Add the required down payment to that, and you have a reason not to take out a mortgage loan.
Lately, many lenders have been pushing a no-fee mortgage loan, which may be the answer for someone who can’t afford to pay for the closing costs all at once. But, as with all the types of loans that are designed to help people who can’t take out a conventional loan, there are aspects of the no-fee mortgage which, depending on your situation, can make the overall cost of your loan much higher.
What is a No-Fee Mortgage?
Like its name implies, the no-fee mortgage is a type of mortgage loan that doesn’t require the borrower to pay any closing costs or fees. Fees for appraisals, processing, applications and many others are all waived, at the cost of paying a higher interest rate. Depending on each borrower’s situation, this might be the perfect solution, or something that will come back to haunt them later.
Closing costs can total over $5,000, so having these costs waived sounds really good for a borrower who also has to make a hefty 20 percent down payment when taking out a mortgage. This type of mortgage has its pros, but it also has serious cons. The decision of whether to apply for this loan should be based on each borrower’s individual budget and financial situation, not on the fact that you get to save several thousands in the beginning.
Pros and Cons of the No-Fee Mortgage
One of the pros of choosing this type of mortgage is that you will be protected against being overcharged on fees and closing costs. Usually, when a borrower shops for a mortgage loan, he or she only looks at the interest rates when comparing loans. Then, when the closing time comes, they are taken by surprise by all the fees that have to be paid. Lenders usually add several junk fees to the closing costs, driving the cost a lot higher than the borrower would expect. Because a no-fee mortgage requires the borrower to pay a higher interest rate and no closing costs, the borrower can easily compare loans from different lenders by just looking at the interest rate.
Another advantage of no-fee mortgages is that, even though the interest rate is larger, the rate that you are paying is tax deductible.
The largest disadvantage of a no-fee mortgage is that that borrower will have to pay a higher interest rate than he or she normally would, if they paid the closing costs. The higher interest rate is calculated by estimating the closing costs and finding the right interest rate that will cover them. The high interest rate can become burdensome over time, so it’s important to consider all aspects before taking out a no-fee mortgage loan.
Alternatives to the No-Fee Mortgage
The easiest alternative to the no-fee mortgage is to pay for the closing costs when the time comes. This is the best and probably cheapest choice, but it requires you to come up with a fairly large amount of money on top of the already expensive down payment.
Adding the costs to your loan amount is another alternative to the no-fee mortgage. With this option, your lender will roll your closing costs and loan amount together, and you will have to pay the entire amount, with interest, over time. The advantage is that you won’t have to pay all those fees at closing, but the disadvantage is that this means you will take on more debt.
No-fee mortgages are a good choice for borrowers who can’t pay the closing costs upfront. By waving those fees, more people can afford to become home owners, but it is very important to understand that the fees will still be paid through the higher interest rate. Because closing costs take a long time to recuperate with a conventional loan, the no-fee mortgage is also a great option for those who don’t plan on living in a home for a long time. Proper knowledge of your financial situation and plans can help you better determine if this type of mortgage is for you, or if you should take a more traditional route to becoming a home owner.