"No Cost" Home Loans - What's the catch?

I hear a lot of advertising these days about "no closing cost loans" and how the lender will pay all your costs. Although this sounds like a great idea at first, I think it deserves a bit more research.

Do you really think lenders will do your loan for free? No one works for free, so there has to be a catch right? Absolutely. Any lender can offer a low/no cost loan by simply increasing the interest rate. Instead of paying up front, you simply pay over the life of the loan.

Now to be fair, this may be a very good option for your particular situation but you have to look at all options to be sure. Here's the deal, every interest rate has a price to it. The lower the rate, the more you pay in "points" and the higher the rate, the less you pay, or even have costs paid by the lender. When looking at all your options, ask yourself;

How long will I be in the home?

If this is your "forever" home, I don't recommend opting for a "no cost loan". You will pay far more in interest over the life of the loan than the initial cost. Conversely, if this is a starter home or short term proposition, a low/no cost loan might be perfect.

How long will I have this loan?

Even if you think you will be in the home "forever", you might not have this same loan as you may refinance to eliminate mortgage insurance, take cash out, remodel, the list goes on and on. The average length of a mortgage loan is 5-7 years so from a short term perspective, a no cost loan might be in your best interest.

How much am I saving versus the monthly cost?

Remember, I said that a "no cost loan" carries a higher interest rate so this will yield a higher monthly payment as well. Use your best judgement to determine if the higher payment is worth not having to cough up closing costs.

Still have questions? Contact me today, and I'd be happy to help.

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