No-cost Mortgages

Those who consider a �no-cost� mortgage should be advised that its name may be misleading, and should refer back to the old platitude that there is no such thing as a free lunch. That is not to say that no-cost mortgages are necessarily bad, they are simply badly named.

Rather than eliminating all up-front costs completely, these loans operate by adding these costs to the principle of the loan. You save money in the short term, but pay more in the long term by having to pay interest on these fees. A better name for the loans might be �no-cash�. In every other respect, these loans operate just like any fixed rate mortgage.

Not only do you lose money by having to pay interest on a higher principle, you also usually are charged a higher rate for the no-cost feature. Because the main benefit of a no-cost loan is the ability to avoid cash outlay up front, they are most advantageous to those who do not plan to hold on to their purchase for a long time. If you plan to keep your mortgage for longer than the break-even period, or the period where the cost of a higher rate is equal to the upfront savings, then a no-cost mortgage is not a good fit for your needs.

No-cost loans do have some other advantages, however. They reduce the lender�s ability to make money by padding fees, thereby reducing the chance you will be overcharged. No-cost loans can also limit brokers� fees � a fairly recent study by Susan Woodward showed that no-cost loans had settlement costs that were on average $1500 lower than other loans. Most of this difference was attributed to lower broker fees.