The Myth of the "No-Cost" Mortgage Loan
There really is no such thing as a no-cost mortgage loan. There are always costs, such as appraisal fees, escrow fees, title insurance fees, document fees, processing fees, flood certification fees, recording fees, notary fees, tax service fees, wire fees, and so on, depending on whether the loan is a purchase or a refinance. The term “no-cost” actually means that your lender is paying the costs of the loan. All a no-cost loan means is that there is no cost to you, the borrower. Except that you pay a higher interest rate.Understand How Loans Are Priced
A variation of the no-cost loan is the “no points” loan, or even the “no points, no lender fees” loan. On these loans you pay all the costs associated with buying a house or refinancing, but you do not have to pay the lender associated fees or points. However, since lenders and loan officers do not do anything for free, the profit has to come from somewhere.First, you have to understand how loans are priced and how mortgage lenders and loan officers earn income. Each morning mortgage companies create rate sheets for loan officers. The rates usually change slightly from day to day. In volatile markets they change several times a day. On the rate sheet, there are many different programs, including the thirty year fixed rate. There will be one column that lists several different interest rates and another column that lists the cost for that particular rate.
| Rate | Cost (points) |
|---|---|
| 6.250% | 2.000 |
| 6.375% | 1.500 |
| 6.500% | 1.000 |
| 6.625% | 0.500 |
| 6.750% | 0.000 |
