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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What is a No Fee Mortgage?
When a lender does not charges any fees for a mortgage application, appraisal, underwriting, processing, private mortgage insurance, and other third-party closing costs then it is termed a no fee mortgage.
Understanding no fee mortgage
The interest rate of a no-fee mortgage is already incorporated in the fees bank charges.
While charging a slightly higher interest rate over the duration of the loan the lender covers many closing costs and fees upfront.
Though it decreases the cash the buyer needs to provide upfront in addition to the down payment it increases the borrower’s monthly payment.
No-fee terms vary from lender to lender. Certain taxes like transfer taxes or attorney fees will not get covered even when a mortgage is marketed as “no fee” by some lenders. Similarly, flood and private mortgage insurance too are not included.
In cases with no-fee mortgages, a borrower is required to hold the loan for a minimum period of time, otherwise, they need to pay an early repayment or cancellation fee to the lender.
If the borrower makes payments ahead of schedule then the lender could charge a prepayment penalty.
If the loan needs to be closed before a certain date then, the bank would want closing costs to be repaid. Such policies help to safeguard the bank’s profit.
For borrowers, only if you plan to hold the mortgage for a few years then a no-fee mortgage would make financial sense.
Even if you as a borrower can save on closing costs in the short term, you will wind up paying thousands of dollars in extra interest over the life of a 30-year mortgage.
No fee mortgage example
For instance, if a mortgage applicant with a 30-year, fixed-rate term borrows $500,000.
Bank A may offer a traditional mortgage of a fixed interest rate of 4.5 % and a closing cost of $3,000.
While Bank B may offer a no-fee mortgage at 5 % fixed and zero closing costs.
The borrower would pay $2,533 of monthly payment to Bank A. And $2,684, or $151 more each month to Bank B.
After less than two years of payments with Bank B, the borrower would have paid the bank $3,000 which would have covered the closing costs otherwise.
After that every month the bank earns an additional $150 because of the higher interest rate.
So over 30 years, Bank B would be paid $54,000 more by the borrower than the loan from Bank A.
If the mortgage is for a shorter time period then it will decrease the total cost of the loan.
The homeowner could refinance at a lower rate if the interest rates fall. However, if rates rise or property values fall then the option of refinancing is useless.
How does a no-fee mortgage refinance work?
A no-fee mortgage refinance is essentially a loan transaction in which the lender pays settlement costs like processing, underwriting fees, appraisal fee, loan origination fees, and third-party costs like title or escrow fees.
When we assume the lender actually pays your closings costs, it will add to your interest rate, sometimes sizeably, so as to cover up for the missing fees that are typically charged to you at closing.
Conclusion
While no fee mortgage type of offer is not a new concept, or unique, it’s definitely a subject worth knowing to understand what you’re getting when you choose this option.
Instead of paying your closing costs, your lender pays it for you. In other words, it just means that you won’t pay these fees directly, it is just covered in some fees or others.
A no-fee mortgage refinance will result in a higher interest rate.
For some borrowers, a no-fee mortgage is a necessity because they don’t have the required funds in hand to pay all the fees at closing, but for others, it could simply be a decision that will need to be made during the mortgage process.
