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The term "No-Cost" mortgage can be misleading because there are always costs associated with mortgage loans. Costs will include any number of fees and which fees will apply depends on whether or not your loan is a purchase loan or a refinance. The following are just a few examples of some fees that might apply to your mortgage loan:
A variation to the "No-Cost" loan is the "No Points" loan, or the "No Points, no Lender Fees" loan. With these types of loans, the borrower pays all the costs associated with buying a house with or refinancing a home, but the borrower does not pay any lender fees or points. This might not make a lot of sense because lenders and loan officers do not work for free, so where does the profit come from? By understanding how loans are priced, you will have a better idea of how the "No-Cost" or "No Points" mortgage options work.
Understanding how loans are priced can be confusing to many home buyers, so taking the time to ask questions and do your homework is extremely important to ensure that you get the best mortgage price.
Every morning, mortgage companies generate rate sheets for their loan officers because the rates are not static meaning they can change constantly from day to day. The rate sheet lists many different programs with one column listing several different interest rates and another column which lists the costs for the particular rates as shown in the following example columns:
| Rate | Cost (Points) |
| 6.250% | 2.000 |
| 6.375% | 1.500 |
| 6.500% | 1.000 |
| 6.625% | 0.500 |
| 6.750% | 0.000 |
| 6.875% | (0.500) |
| 7.000% | (1.000) |
| 7.125% | (1.500) |
| 7.250% | (2.000) |
In the example columns shown above, the rate of 6.75% has a "par" price meaning it has no cost associated with the loan. If you decide that you require a lower rate, you will pay a higher cost or higher "points". A point is equivalent to one percentage point of the loan amount being borrowed. If you are willing to take on a higher rate, the lender is often willing to offer rebates or premiums meaning the lender will pay out money to the borrower for accepting the higher rate.
The parentheses around the cost in the above columns for the higher interest rates indicate a negative number. For example, (2.000) for an interest rate of 7.250% is equal to -2.000, meaning the lender pays money to you, the borrower, instead of you paying an associated cost for the loan.
Mortgage companies and mortgage officers do not share their daily rate sheets with clients or the public. The sheet is meant for in-house company use only hence most lenders have a policy stating that the rate sheet is private and confidential. The cost column on the sheet refers to the loan officer's costs for loans and not the cost to you, the borrower. When a loan officer gives a client an interest rate quote, he or she usually adds one to one and a half points to the quote. Most companies leave the add-on cost to the discretion of the loan offer, but the company usually requires at least a minimum add-on of one point.
How much commission a loan officer makes depends on the add-on and the "split" with his or her company. The loan officer receives a portion of the add-on and the company receives a portion. For example, if you want a "No Points" mortgage loan, your rate would be 7% based on the rate sheet example above. The loan officer and the mortgage company would split the one point rebate as listed on the rate sheet.
Lenders have other various fees that they like to collect in addition to the costs noted on their rate sheet. Such fees can include processing and underwriting fees, tax service fees, document fees, etc. However, as a borrower, you should be aware that some of these are legitimate costs to the lenders while others are simply designed to general additional income for the mortgage company The cost of these additional fees can range from approximately $600 to $1300 in today's mortgage market. In addition, you might be charged an appraisal fee and a credit report fee. These fees are often contracted to outside independent companies, but are still considered to be lender fees.
It is important to consider what fees will be paid when shopping for a mortgage, but be aware that shopping based solely on what fees are charged is not necessarily going to get you the best price. For example, companies who offer slightly lower interest rates will often charge higher fees to have these rates whereas companies charging lower fees will offer slightly higher interest rates. If you select a mortgage because you are paying lower fees, you might end up spending more money in the long term because you took a higher interest rate on the loan just to save a few bucks up front.
All of the fees and costs of your purchase or refinance do not come from your lender. For example, the escrow or settlement company involved in the transaction will charge a fee. Title insurance is required and the title insurance company charges a fee for providing the insurance. If information is required by the lender from your homeowner's association, (if applicable) the association will mostly likely charge a fee to provide the documentation to the lender.
When it comes to refinancing your home, your current lender will charge a demand and a reconveyance fee. The demand fee is charged simply for providing payoff information. The reconveyance fee is charged because your current lender prepares a document to release your property as collateral for their outstanding loan.
These additional fees can add another point to how much must be collected in premium pricing to cover the costs associated with your purchase or refinance. For a "No-Cost" loan, the loan officer must collect approximately two and a half points to cover all of the associated costs with the loan.
Points are a percentage of your entire loan amount and because most of the costs are fixed, it takes fewer points for lender to offer a "No-Cost" loan on higher loan amounts. If the loan amount is smaller, it will take more points to get a "No-Cost" loan from your lender. For example, one percent of $200,000 is $2000 whereas one percent of $90,000 is only $900, so it is definitely easier to cover the costs on a larger loan when you are collecting more money.
Individual circumstances will determine whether or not it is worthwhile to get a "No-Cost" loan. For example, if you plan to stay in the home for a long period of time it does not make sense to take out a "No-Cost" loan because over thirty years you will end up paying more than $30,000 extra for the loan.
If you only intend to keep a property for five year, it makes sense to take the "No-Cost" option at a higher interest rate. However, if you knew you were only going to keep the property for five years, it does not really make sense to take a thirty year fixed rate anyway. It makes more sense to take a loan that has a fixed payment for the first five years, and then you can convert the loan to an adjustable or fixed rate in five years. This type of loan has an interest rate of almost half a percent lower than the thirty year fixed rate loan.
Overall, "No-Cost" loans sound great on the surface and when it comes to advertising. They are effective for getting people in to see the lender, but for the most part they just do not make sense for home buyers.