| No
Cost Loan - Who pays for it?
No-cost loans have become very popular with lenders. These loans, as the
name implies, have no appraisal fees, document fees, or even points tacked
onto them. You can just show up at the closing and sign the dotted line.
No out of pocket expenses. As great as no-cost loans sound, there is one
drawback. To get one you usually have to pay an interest rate that is
1/2 to 5/8 of a percentage higher than the “full cost” rate.
So, which is the better deal, a no-cost loan, or a regular loan with a
lower interest rate? The factors that really matters are how much you
are looking at in expenses, and how long you plan on living in your home.
Example: a homeowner with a $200,000 home and $5,000 in closing costs
would have to live in the home for just over 3 years to recover the up
front costs of a regular loan at 7% interest, rather than getting a no-cost
loan at 7.5%. So if the homeowner planned to be in the house still 4 or
5 years from now, he/she should look to getting a regular loan with a
lower interest rate. If not, definitely go for the no-cost loan.
If you do decide to get a no-cost loan be sure to talk to the lender and
clarify exactly what they define no-cost loans as. There are some lenders
who have no closing fees associated with their loan, but they find other
ways to get the money back whether it is fees to third parties, or raising
the amount of loan to get the money back through interest. Just be careful
to make sure you know how your plan works. A true no-cost loan will have
only two expenses.
These are:
- The slightly
higher interest rate
- Escrow
accounts
A no-cost
loan can be a useful stopgap in situations where you are not sure if you
will be moving shortly. You can save some money while waiting for the
situation to clarify, and if it turns out that you won’t be moving
you can refinance again later.
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