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No cost mortgage -- just the term immediately draws the attention of consumers looking to purchase a home! But, before you become too excited at the prospect of a no cost mortgage, be sure you know exactly what you are getting into. Although no cost may sound like more cash in your pocket, often no cost just means not paying some of the settlement and closing costs, or no fees in areas you might have expected to pay them; the mortgage lender or financial institution will pay for those settlement charges up front, but the cost is really in the mortgage! There is no such thing as something with no cost! There are a few exceptions which vary with each no cost loan, including transfer taxes, escrows for taxes, homeowners insurance, and a few other items as well depending on the lender.
Most fees -- from the title insurance to appraisal fees for the home -- will be covered so that the borrower can close on their home. Be aware that this does not mean you are not being charged in the long run though, because fees still do apply.
So, what are the benefits of a no cost mortgage? If you are a first time homebuyer or someone who is refinancing your home to help reduce the cost of monthly mortgage payments, you may have almost no funds available to put towards the cost of closing or settlement charges of a mortgage. If that is the case, you may want to consider a mortgage with the no cost plan, because the lender will include many of those fees incorporated into the entire overall cost of the mortgage, you will have no part of these to pay upfront. Of course, you are being charged these fees, but the lender just gives the borrower money up front to pay for costs that they have no cash to afford right away. What happens in this situation is that the borrower is usually offered a higher interest rate on the total cost of the loan. For borrowers who are interested in keeping a mortgage for a long period of time, this may not be the best route to take, since that higher interest rate will continue over the entire life of the mortgage Ė perhaps 30-years!
If you are a borrower who plans to refinance in the near future or someone who will not be keeping the home for the entire 30 years of the loan, this may be a good option for you. If you have no plans to move, this might not be the best mortgage due to overall cost. Of course, there may be substantial prepayment penalties so that the lender can recoup these upfront expenses, so always check the fine print!
Be sure when you are taking into consideration a no cost mortgage that you determine how the costs will be paid later. Make sure you are clear on whether or not the closing fees will be added right onto that $100,000 loan you have requested and will be part of the monies to which interest is accrued as well. Again, this is important to know because that interest will add up over a long period of time. Get the details from your lender so you are clear exactly what is being done to pay the fees of this no cost mortgage.
Remember not to confuse a no cost mortgage with a no cash mortgage, which sounds the same but has a completely different meaning. No cash can mean that either the seller is paying the closing as part of the deal, or that terms have been agreed on so that there is no closing cost, just something added into the price of the cost of the home.
Another important topic to cover with the mortgage company offering the no cost loan is any fee that many not be covered in the no cost mortgage. For instance, some mortgage companies will require primary mortgage insurance (PMI), also known as primary mortgage insurance. If the mortgage company does not require something, there is a good chance it is not included in the mortgage and you have to obtain it on your own at your own expense. This means you may think you are not paying any fees for the closing costs, but in fact you are still responsible for some fees which are normally covered during this process. Be sure to sit down with your mortgage lender and go over the agreement of the loan so you are clear what the terms of the agreement are. If you are unclear as to precisely how you will be charged for a no cost mortgage, donít be afraid to ask as many questions as necessary until you are completely clear on every single point!
Special Mortgage Types
The 40 Year Mortgage
Buy to Let
Adjustable Rate (ARM)
No Cost Mortgages
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