No-Cost Mortgage
Definition of "No-Cost Mortgage"
A mortgage on which all settlement costs except per diem interest and escrows are paid by the lender and/or the home seller. A no-cost mortgage should be distinguished from a 'no-points mortgage,' which will have other settlement costs, and a 'no-cash-outlays mortgage,' on which settlement costs are added to the loan balance. Calling the latter 'no-cost' is extremely deceptive. A true no-cost mortgage is one where the interest rate is high enough to command a rebate from the lender that covers the closing costs (except for per diem interest and escrows, which borrowers always pay). In general, they make sense only for borrowers who expect to hold their mortgages for no more than five years. A borrower with a longer time horizon and who has the cash to pay settlement costs ought to avoid the no-cost option. Lenders demand a high interest rate for rebates because they assume they won't enjoy it very long. The average life of high-interest-rate loans is short. A borrower who pays the high rate for a long time gets a bad deal. It is akin to a healthy person buying life insurance from a company that mainly insures diabetics and smokers and prices its insurance accordingly. The critical number for potential borrowers is the 'break-even period' (BEP) for a no-cost loan, relative to the same loan with a lower rate on which the borrower pays the costs. Over periods shorter than the BEP, the no-cost loan has lower costs. Beyond the BEP, the no-cost loan has higher costs. One important side benefit of no-cost mortgages is that shopping for them is relatively easy. The shopper needs quotes on only one price dimension the interest rate.
Popular Mortgage Terms
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrowers delinquency. ...
Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. Rate protection can take the form of a ...
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The sum of all interest payments to date or over the life of the loan. This is not a good measure of the cost of credit to the borrower because it does not include upfront cash payments and ...
Fees collected by a loan officer from a borrower that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer. An underage is the opposite ...
The interest rate used to calculate the mortgage payment. The interest rate and the payment rate are often the same, but they need not be. They must be the same if the payment is fully ...
A letter from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment ...
The amount the borrower promises to repay, as set forth in the loan contract. The loan amount may exceed the original amount requested by the borrower if he or she elects to include ...
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