Are No Fee Mortgages too Good to be True?

The short answer to this question is yes.  The old adage, “nothing is free” is true in this case. “No fee”or “zero closing cost” mortgages are not exactly what their names say they are. Fees exist when you borrow money, these loans just change how and when you pay them. “No fee” and “zero closing cost” mortgages do not typically require you to come to closing with a check to pay the fees, but don’t make the mistake of thinking you will not pay closing costs.

MSN Real Estate has a great article written by Marilyn Lewis that explains the various options and what they mean when you are presented with a “no fee” mortgage option.

The options
Here’s a summary of the three ways to pay the fees, with pros and cons: 

1. Pay in cash at closing. The simplest and often cheapest approach is to pull out your checkbook when you sign your mortgage contract and write a check to cover the costs.
  • Pros: If you have the cash, this may be best because you can avoid financing charges.
  • Cons: You’ll need to produce several thousand dollars. Also, as you’ll see in a minute, if you refinance again or sell soon, there’s a chance you could save by not paying cash.

2. Add the fees to your loan amount. When lenders talk about “rolling in” your fees, this is what they mean. Say you’re borrowing $180,000 to buy or refinance your home. The loan fees are $3,000. Roll them together and your new mortgage balance becomes $183,000. You repay the increased balance with interest on the entire amount.

  • Pros: No cash required. Spreading the fee across your monthly mortgage payments lets you soften the immediate financial impact of the mortgage purchase.
  • Cons: You’re taking on extra debt, and the cost of financing that larger amount is worked into your monthly payment.

3. Pay a higher interest rate (no-fee option).You’re financing your fees again, but instead of adding to the loan balance, you accept a slightly higher interest rate.

  • Pros: Your loan balance stays the same. The interest you pay on the fees qualifies under the federal income-tax mortgage deduction.
  • Cons: You pay a higher interest rate on the entire mortgage

Read the full article on MSNMoney to see examples of closing costs and when it may be a good idea to take advantage of these mortgages.

About Sutton Lipman

Sutton Lipman Costanza is a native Nashvillian and a second generation REALTOR. She is excited and proud to be a part of The Lipman Group Sotheby’s International Realty team. Sutton graduated with a Bachelor of Arts degree from The George Washington University. Before selling real estate, she worked at Centerstone, a community-based behavioral health care organization in Nashville. In her free time, Sutton enjoys spending time with her family and friends, traveling, practicing Spanish, knitting and playing tennis. sutton.lipman@sothebysrealty.com or 615.438.6149
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