Though no cost loans continue to be fiercely advertised, they may not be the best choice in the current lending environment.
Both Bank of America (Bank of America No Fee Mortgage) and Countrywide (No Cost Refi) are actively advertising no cost loans, but with mortgage rates rising and uncertainty looming, it may be better to pay a little more upfront for the security of a lower interest rate.
A no cost loan is essentially a mortgage in which the lender pays nearly all settlement costs, including processing and underwriting fees, appraisal fee, title and escrow fees, loan origination points, and so on.
While these fees are avoided with a no cost loan, borrowers will find that the interest rate on their loan will be higher to compensate for the missing closing costs, often a quarter to a half percent more, if not higher.
Of course no cost loans can be beneficial when interest rates are in a downward trend, or if you plan to refinance or sell in the near term, as the interest rate carries less weight.
But with home financing becoming increasingly difficult and in many cases limited, homeowners should consider the fact that they might be stuck with their current loan until the dust clears, which could be a substantial amount of time.
Regardless of the current mortgage crisis, if you plan to stay in your home for a long period of time and pay off your mortgage, securing a low interest rate is paramount because over the life of the loan, a slightly lower interest rate will translate to thousands in savings.
That said, it might be best to consider a loan where you pay your own closing costs to ensure you obtain the lowest interest rate on your mortgage.
After all, if you’re refinancing to a fixed rate loan that you presumably plan to stay in for a good amount of time, why pay a higher monthly mortgage payment and a larger amount of interest just to avoid closing costs?
Before you decide whether a no cost loan will work for you, take a look at your unique situation to determine which type of loan will benefit you more.