What Is a No-Cost Mortgage?
Understanding a No-Cost Mortgage
A no-cost mortgage is a mortgage refinancing situation in which the lender pays the borrower's loan settlement costs and then extends a new mortgage loan. In a no-cost mortgage, the lender covers the loan settlement costs in exchange for charging the borrower a higher interest rate on their loan. Despite incurring a short-term expense, when the mortgage lender sells the mortgage into the secondary mortgage market, the lender can sell the mortgage with the higher interest rate for a higher price than a lower interest rate mortgage. A mortgage broker, as opposed to a mortgage lender, sometimes offers the same no-cost mortgage because they may receive a rebate from the lender to cover the cost or as payment.
It is important not to confuse a no-cost mortgage with a no-cash mortgage. Borrowers frequently mix up the two. In a no-cash mortgage, the loan settlement costs are rolled into the loan's principal balance, and therefore the borrower pays for the settlement costs over time with compounded interest. This differs from the no-cost mortgage, where the borrower pays for the loan settlement costs 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.
The Type of Mortgage That’s Best for You
Purchasing a home and taking on a mortgage loan is a large financial burden. There are several kinds of mortgages that, depending on your financial situation, can make buying a home and taking on a mortgage easier in the long run. For example, an individual may take out a rate-improvement mortgage. A type of fixed-rate mortgage, the rate-improvement mortgage contains a clause that allows the borrower to reduce the fixed-interest-rate charge on the mortgage one time throughout the life of the loan. A fixed-rate mortgage, one of the most common forms of home mortgages, has a fixed interest rate for the entire term of the loan. Allowing for a one-time interest rate improvement enables borrowers to take advantage of a more favorable borrowing market in the future, as the borrower can take advantage if interest rates fall lower than the borrower’s initial mortgage rate. The borrower should be careful, as while this can be a great opportunity, a rate improvement mortgage can sometimes come with a fee and begin with a a higher-than-market interest rate.