How does a “no-cost” mortgage work?
As a borrower, you may be expected to cover out-of-pocket expenses at the closing. These fees & costs can include: title insurance, a title search, appraisal, credit check, and other charges; And sometimes, the amount of these costs can add up to be between 2-5% of the mortgage amount. However, it is possible to negotiate these expenses as the Lender may be willing to cover some of these additional mortgage costs as well.
So what is a No-Cost Mortgage?
This is when a borrower is able to use enough Lender Credits to cover all of the closing costs.
A way to obtain a No-Cost Mortgage is through Lender Credits
The argument of Points vs. Lender Credits are made time & time again in regards to obtaining any mortgage. (As a friendly reminder, a Point is 1% of the total mortgage amount and, for each point you’re willing to pay upfront at the closing, it’ll lower your monthly interest payment. Lender Credits operate in the opposite manner, meaning (for each credit) you can lower your out-of-pocket closing costs in exchange for a higher monthly interest payment.)
No-Cash Refinance Loans
It’s possible to refinance having fees already bundled into the mortgage. The upside to wrapping closing costs into the new loan is that you get a lower interest rate than if you were to raise your rate to pay for costs. The downside is that you lose home equity when you include closing costs in your refinance loan. In addition, because the costs are being financed, you’ll pay interest on them.