What is a free mortgage loan?
When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible. Any opportunity that a borrower can exploit to save money on the cost is a big win.
This is what explains the attraction of free mortgages. These home loans and their promise to cut pesky fees always sound appealing – a lack of lender fees or closing costs is sweet music to a borrower’s ears.
However, they come with their own set of advantages and disadvantages.
No-fee mortgages have experienced a renaissance given the current economic climate, says Ralph DiBugnara, president of Qualified reception. “No-cost programs are popular among those looking to refinance… [and] first time buyers [have] also increased with regard to interest ”.
Be prepared for a higher interest rate
But nothing is really free, and that maxim also applies to no-cost mortgages. They almost always carry a higher interest rate.
“Over time, paying more interest will cost a lot more than paying an upfront fee,” says DiBugnara. “If the offer is free, the first question to ask yourself is:” What is my price if I pay the fees? “”
Randall Yates, CEO of The network of lenders, decompose the calculation.
“Closing costs are typically 2-5% of the loan amount,” he explains. “On a $ 200,000 loan, you can expect to pay around $ 7,500 in lender fees. Let’s say the interest rate is 4% and a free mortgage has a rate of 4.5%. [By securing a regular loan], you will save over $ 13,000 over the life of the loan.
So although you may have saved $ 7,500 in the short term, in the long term you will end up paying more due to a higher interest rate. Weigh it with your financial situation.
Take into account the life of the loan
And before you start figuring out how much money you think you can save with a no-cost mortgage, think about your long-term financial strategy.
“No-cost mortgage options should only be used when a short-term loan is absolutely necessary. I don’t think this is a good strategy to deal with the problems related to COVID-19, ”says Jack Choros of CPI inflation calculator.
A no-cost mortgage can be a smart tactic if you don’t plan on staying in one place for a long time, or if you plan to refinance quickly.
“If I’m looking to move in a year or two, or if I think the rates might be lower and I could refinance again, then I want to keep my costs down,” says Matt hackett, operations manager at Fairness now. But “if I think I’m going to be in the loan for 10 years, then I want to pay more up front for a lower rate.”
What additional fees should you be prepared to pay?
As with any major purchase, whether it’s a car or a computer, there is no fixed “that’s it” price. Hidden costs always hide in the fine print.
“Most of the time, the cost of credit reports, registration fees, and flood service fees aren’t included in a no-charge promise, but they’re minimal,” says DiBugnara. “In addition, the evaluation will always be paid for by the consumer. They are considered a third party vendor and must be paid for separately.
“All other costs such as property taxes, home appraisal, home insurance and private mortgage insurance will always be paid by the borrower,” Yates adds.
It is important to ask what additional fees are required, as they vary from lender to lender and state to state. The last thing you want is a huge surprise.
“Deposits required to open your escrow account, such as flood insurance, home insurance and property taxes, are normally paid at closing,” says Jerry elinger, head of mortgage production at Silverton Mortgage in Atlanta. “However, most of the costs can be covered by making them part of the cost of the loan or paying a higher interest rate.”
When Does a No-Fee Mortgage Make Sense?
For borrowers who want to save money now, but aren’t afraid to pay more over a long period of time, a no-fee mortgage might be the perfect solution.
“If your plan is long term, it will almost always make more sense to pay the closing costs and take a lower rate,” says DiBugnara. “If your plan is short term, then no closing costs and paying more interest over a short period will be more profitable. “