DEFINITION of 'No-Cost Mortgage'

A mortgage refinancing situation in which the lender pays the borrower's loan settlement costs and then extends a new mortgage loan. A lender does this in exchange for charging the borrower a higher interest rate. When the lender then sells this mortgage into the secondary mortgage market, the price it will receive for the mortgage is based on the interest rate on the mortgage.

A mortgage broker would do the same based on the size of the rebate they might receive from a lender.

BREAKING DOWN 'No-Cost Mortgage'

Do not confuse a no-cost mortgage with a no-cash mortgage. This is a mistake borrowers frequently make. With a no-cash mortgage, the settlement costs are rolled into the loan's principal balance, and will therefore be paid for over time, with compounded interest.

With a no-cost mortgage, the borrower pays financially in the form of higher interest charges on a lower principal balance. A borrower should perform a thorough analysis to determine the most suitable mortgage option.

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