No Cost Mortgages Come at a High Cost

You’ve seen the ads on TV. Lenders offering “home-equity loans" or a refinance of your existing mortgage as a quick source of cash, or way to get out of other types of debt quickly. There are still lenders who are advertising their “no fee” mortgages. These loans are being offered as having “no points, no closing costs, and no fees of any kind.” What they DON’T tell you in the commercial is what the terms of these “no fee” loans are.

Lenders are in the business of making money, so you need to be aware of how these “no fee” loans work. You can bet that these fees are figured into the cost somewhere, so it is important that you make yourself familiar with what a loan entails. Too many consumers are going into this type of transaction without really understanding the risks involved. As a result, more consumers than ever are finding themselves facing foreclosure and losing their homes, which have a very negative affect on the housing market.

For these “no fee” loans, borrowers will generally face much higher interest rates on the loan, a host of additional “miscellaneous” fees, and sometimes find themselves having to finance the loan for a longer period than they want. The borrower may also be asked to pay mandatory personal mortgage insurance (known as PMI which costs an additional amount equal to between 0.15% and 2.5% of the total amount borrowed) or optional credit insurance, such as credit life, disability, or unemployment insurance, all of which helps the lender protect their assets.

When you hear about ‘no closing cost’ loans, think about who pays those costs. They never just disappear, but are always built into the loan somewhere. When you apply for a mortgage, don’t be swayed by the lenders’ promises if they sound too good to be true. Decide for yourself if it is more important for you to pay the least amount of closing costs right now, or if it is more important for you to get the best loan possible at the best interest rate and best terms possible. You will always get a less appealing loan when you forego the closing costs. If you can afford to pay the costs that are usually charged at closing, you will have saved yourself thousands of dollars over the life of the mortgage rather than if you had included those costs in the loan.

Consumers must know the terms of their loans and make decisions based on facts rather than base their decisions on teasers like ‘no costs whatsoever’. Be sure to ask your mortgage broker to give you a “Good Faith Estimate” (required by federal law) showing the true costs of the loan and ask to see a few different scenarios so that you can make a well-informed decision, before you fall into what could be a situation that costs you thousands of dollars extra and could put your home in jeopardy.

ABOUT THE AUTHOR: Patricia Adkins is a specialist on the subject of mortgages and real estate. Her web site, http://www.FreeConsumerService.com, provides a wealth of informative articles and resources on everything you'll ever need to know about getting the best deal when you buy a home or refinance your existing mortgage.