While a no-cost mortgage might sound like a great idea on the surface, the reality is much more disturbing. No cost mortgages can land homeowners in hot water. Here are the basics regarding no cost mortgages loans.
Aggressive Lenders Who Market No-Cost Mortgages
Nowadays, more and more lending companies are pushing advertisements that promise a no-cost mortgage. These ads make it sound as if the mortgage company won’t charge any fees for the loan.
Lenders who try to sell no-cost mortgages are actually attempting to convert their customers into serial refinancers. These lenders will take care of all “closing costs,” but they will funnel these costs into other expenses. So, even though you don’t have to pay closing costs for your mortgage, it’s likely that you’ll be hit with a higher interest rate.
Buying Points to Reduce Rates
Since you can buy points to reduce your mortgage rate and increase your rate in return for negative points, accepting a high market rate on the loan gives the lender the affordability to pay your closing costs. In no-cost mortgages, only the lender benefits.
If you intend on living in a home for a very short period of time, then you might be particularly attracted to the idea of saving on closing costs. Since closing costs can really add up to a hefty sum, many homeowners would rather save on closing costs in exchange for paying higher interest for a short period of time.
However, you have to be sure that you can exit the deal or sell once you’re ready. Otherwise, you will be stuck with an abnormally high interest rate.
No Cash and No Cost Loans
Many companies also offer what’s called “no-cash” loans, which differ from no-cost loans. In no-cash loans, companies will roll all of the closing costs into the balance of a new loan.
No-cost refinances, therefore, will appear to have more competitive prices than no-cash refinances. The problem is that no-cost refinances include much higher interest.
Many lending companies might include other fees within the no-cost mortgage. These fees can include escrow fees, title fees, transfers, and many other common home ownership fees. If you do wish to opt for a no-cost mortgage, be sure you don’t get hit with any of these fees.
Also, you should ask the company upfront if they are going to roll the closing costs into your mortgage interest. You might end up paying up to $150 a month more on your premiums.
Avoid Refinancing and Secure a Good Deal the First Time Around
This is why it’s generally advisable to avoid no-cost mortgages. Traditional mortgages might cost more upfront, but you’re able to manage monthly interest rates better.
Statistics show that the vast majority of people who own no-cost mortgages end up refinancing within 2.5 years. Essentially, these people are trying to salvage a good deal out of a messy situation.
As a consumer, you need to be alert and aware of the dangers within the lending industry. It’s best to avoid these situations entirely by ignoring those sales pitches that promise “a no-cost mortgage.” If you need a mortgage, opt for a loan that is a lot more transparent and affordable. That way, you can manage your loan and your home.