Zero Cost Mortgages, also known as the No Cost Mortgage seems to be making a comeback because mortgage rates are so low. With rates making the zero cost mortgage more attractive, GetPreQualified decided we should spell things out again regarding these mortgages – the real deal about no cost mortgages so to speak.
If you are thinking that there is a mortgage program out there that doesn’t cost you anything it is time to correct your way of thinking. All mortgages have costs – underwriters, loan officers, processors, appraisers, title companies, attorneys, county recorders, and in some cases even insurance companies all seem to have their hand the mortgage loan cookie jar when it comes to getting paid.
In a typical mortgage scenario, all of these folks get paid their cut through what is called your "closing costs". With a purchase mortgage you are either having to pay this money out of your pocket along with your down payment, or you are getting the seller to assist you through the sales contract that you negotiated. In a refinance loan scenario, you are paying these costs out of your home’s equity (the new loan amount is made of up of what you owe on your old mortgage plus your closing costs) with the new mortgage or you are going to have to pay them through bringing money to your loan closing.
However, in a zero cost – no closing cost – mortgage scenario, you agree to take a slightly higher interest rate for your mortgage which translates into cash upfront to pay your closing costs. In this way, you don’t have to add to your mortgage balance (a good thing in the case where you don’t have any more equity to give because your home has lost value) to get a new mortgage – nor do you have to take money out of your pocket to get your new mortgage. Instead you will pay a slightly higher mortgage payment each month because you elected to take a higher interest rate that what you could have paid if you had the equity in your home and used it to pay your closing costs or if you had taken the money out of the bank.
Zero Cost Mortgage – Compare Different Offers
The no closing cost mortgage isn’t a bad program, but you do have to understand what you are getting. You also have to be careful and compare several loan closing cost scenarios from different mortgage companies. You could end up paying too high of an interest rate than necessary. During the mortgage and real estate hay day of 2005 and 2006 mortgage loan officers were charging interest rate markups in some cases equivalent to 4-5 points in upfront fees – which left the homeowner holding the bag with a higher than necessary mortgage payment.
There is a break even point of something like 5 years where it makes sense to have this program in place, but after that initial period, the loan is now costing you more than normal closing costs because the interest rate is stuck where it is so your mortgage payment stays at a higher amount. Take a good look at what makes most sense – pay now or pay later.
Bottom line – use this program wisely – but the zero cost mortgage does serve a very nice purpose when not abused the parties involved.