Real Estate Guide

Your Mortgage - Questions and Answers
'No-cost or No-fee Loans'

• What About these ads for 'no-cost' loans?
• Is there such a thing as a no-cost or no-fee loan?
• Is a no-cost loan a good deal?

What about these ads for no-cost loans?

In Ohio, the Attorney General and Ohio banking regulators are now going after those who advertise so-called 'free loans'. Such advertising misleads the public because borrowers are often unaware that they are paying a higher interest rate and additional principal in exchange for not paying closing cost fees up front when the loan is secured. New laws now require the lender to disclose fully the nature of the loan.

A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.

Is there such a thing as a no-cost or no-fee loan?

Not really. The loan is called a 'no-fee' loan because the borrower is not charged any fees up front. So called 'no-fee' loans will cost the borrower more over the long term because these costs are often rolled into the new note with higher a interest rate or more principal. A typical no-fee loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan.

Is a no-cost loan a good deal?

Should you choose a no-cost loan with a higher rate (usually by a factor of 1/2 to 5/8 point) or a regular loan? You have to look at your expenses and how long you think you will own the house.

A homeowner with a standard $150,000 mortgage at 6.5% and $3,750 in closing costs,  would have to live in his house for 73 months -- just about 6 years -- in order to break even on the closing costs he would have saved if he signed onto a 'no-cost' loan at 7%. If this homeowner felt confident he'd be in the home at least 7 years, then it would make sense to go with the lower rate.

Further, once the cost of the loan is covered, he'll save nearly $52 per month or almost $18,000 in additional interest over the life of his loan. However, he'd be better off paying the higher rate if he knew he would spend just a short amount of time in the home.