What is a No-Cost Mortgage

There are always fees involved when a mortgage is completed, including credit reports, appraisers, title companies, and underwriting.  These services will get paid when you close; the same as any other loan.  On a No-Cost Mortgage you receive a credit, based on your rate,  that will cover the fees involved in your mortgage.  On a No-Cost Mortgage when you lock the cost are calculated as a percentage of the loan.  This tell the mortgage company what rate will cover the cost and make it a No-Cost Mortgage.

For example the costs involved in a $250,000 mortgage would be an appraisal $500, investor underwriting $895, credit report and employment verification $85, tax service $79, flood certification $30, title fees closing $150, document prep $50, endorsement to title $80, closing protection letter $25, lender title policy $888, wire transfer $25 and recording $65.  That’s $2,872 in fees to close. You can add home warranty or even home inspection to the closing cost if you have extra lender credit above you closing cost.  You have an escrow account with your lender to pay your monthly mortgage insurance, taxes and property insurance you have to set up with 3 months reserves that’s $1,075 at closing.

No-Cost mortgage 3.5% rate may offer a credit of 1.655% of the amount of the loan

Credit for an Interest rate of 3.5% 1.655% = $4,137

Closing Costs $2,872
Prepaid Escrow $1,075

No-Cost Mortgage total closing costs $0 and Escrow fees $0 with a credit of $190 left over for a buyer it can be used for purchasing 2 home warranty service fees!

Full Fee Mortgage 3.25% rate may offer a credit of 0.26% of the amount of the loan

Credit for an interest rate of 3.25% 0.26% = $650

Closing Costs $2,872
Prepaid Escrow $1,075

Full Fee Mortgage total closing costs $2,222 and Escrow fees $1,075= Out of pocket fees of $3,297

You have $3,947 in total allowable costs about 1.57% of the loan amount. For a rate of  3.25% the investor give you a credit of 0.26% of the loan amount or $650 subtract that your remaining fees are $3,297.  For a rate of 3.5% the investor give you 1.655% of the loan amount or $4,137.00 – $3,947 = credit of $190 over your costs.  You can use that to pre-pay repair trips no your home warranty at $65 per trip.  You could pre-pay to have the home rekeyed and to service your furnace or air conditioning for the season.  This is true No-Cost Mortgage, some lenders don’t take into account the escrow account because it’s for prepaid taxes and insurance not loan fees.  On a No-Cost Mortgage as a refinance, the old company will refund you your current escrow account so it’s pretty much even accept the 1 month you will miss when you refinance you’ll have to fund that month’s taxes and insurance!

The difference between No-Cost Mortgage vs Full Fee Mortgages

Full-Fee Option you pay the fees $2,222

No-Cost Mortgage has a credit of $1,265 after paying the closing costs, enough to fund the escrow account

The difference is $3,487 more in cost to pay at closing for the traditional mortgage

The benefits of a No-Cost Mortgage

When it comes to making a decision  on a no-cost mortgage it all come down to the investor credit dollar amount needed at the available  mortgage rates.   The loan amounts must be adjusted to reflect the cash needed to equal paying the closing. It will effectively show the actual cost of shouldering closing costs to get a lower rate. Therefore, we would compare a loan amount of $253,487 at an interest rate of 3.25% = APR 3.47 against a balance of $225,000 at an interest rate of 3.5% = APR 3.56% to be apples to apples.

Full-Fee Mortgage Option : $253,487 @ 3.25% has a P&I payment of $1,103.19. APR 3.47%

No-Cost Mortgage Option: $250,000 @ 3.5% has a P&I payment of $1,122.6. APR 3.57%

By paying a closing cost of $4,781, the monthly payment will be $19.61 lower than the no-fee loan. The breakeven point will be 178 months ($3,487 / $19.61 = 177.82 months).

If you’ll not have the home for 15 years, then doing a No-Cost Mortgage would be the right route to take. If you’ll have the home for longer and you have the extra $3,487 to close.  You will save money $19.61 a month in 177 Months.  Taking into account inflation and the extra interest you get to right off I doubt it make enough saving to spend your money today. No-Cost Mortgage is a great way to maximize your home’s equity because most companies just refinance the fees int your loan so you pay them for 30 years.

THe HomeOwnership Company Mortgage’s

Tom Winand Principal Lending Manager NMLS #317127
The HomeOwnership Company NMLS # 1467345