No Cost Home Mortgage Loans

Many consumers have been asking me about no cost home loans.  The questions I get are — What is the catch with no cost mortgage loans?  — How do I qualify for no cost refinancing? 

Let’s address these questions first.  In most cases there is “no catch” with no cost home loans, but you need to understand the implications between a no cost mortgage and a traditional home loan in which the lender fees are tackec on to the mortgage.  In most cases a no cost refinance may have a slightly higher interest rate than a loan in which you pay the lendeing fees.  Third-party fees do exist in any mortgage transaction and no one is working for free.  When a lender offers a no cost loan, in most cases they are paying your lending fees from the “yield spread premium”, which is paid by the bank to them for the interest rate they charge you.  The higher the interest rate you pay, the more the bank pay them on the “backend.” 

When considering a no fee mortgage, consider the following factors:  1. How Long do you plan to live in your home? (if you are planning on keep this loan for at 10 years or more, the lower interest rate mortgage option paying the lender fees usually comes out less expensive for you.)  2.  Do you need the tax deductions that are associated with lending fees?  (Ask your tax consultant, because many people write off the lending fees in addition to the interest they pay on their mortgage.  This means it may benefit you to have lending fees.)

No cost home loans have their advantages, but they may not be for every borrower.  If you are interested in no cost refinancing make sure you keep your credit scores high and that you can document your income.