Ny2013 blog ai nocostmortgage

No-Cost Mortgages Still Cost

For most of us, sniffing out deals has become second nature. Our ears perk up at the mere mention of “free” or “no cost.” But when it comes to your mortgage, “no cost” is not the same as “free.”

No Cost vs. Traditional

In a traditional mortgage, the borrower pays certain fees, appropriately called closing costs, when the loan closes. Closing costs average $3,700 nationwide and include costs incurred by the lender to process the loan such as attorney fees, title company fees and document preparation fees. Since closing costs can equal 2–4% of the loan amount, an offer to skip these fees sounds like a good deal.

Ny2013 bv budget1

But we know lenders don’t pay these fees out of the goodness of their hearts. Someone has to pay them, and it isn’t going to be the bank! What happens is the borrower ends up paying a higher interest rate in exchange for the no-cost closing. That means, over time, the borrower could end up paying more in interest than he would have by paying the closing costs up front.

A quick note: No cost is not the same as no cash. In a no-cash closing, the costs are rolled into the loan balance, and the borrower pays interest on them over the life of the loan.

Deal or No Deal?

So is a no-cost loan a good deal? Let’s do the math on a $200,000, 15-year mortgage. Over the life of the loan, you’ll pay $8,900 more with a no-cost loan at 4% interest than you would on a traditional mortgage at 3.5%. That’s an extra $50 a month. If your closing costs are $3,700, you would break even with the traditional option in about six years.

In this case, the no-cost option will not be to your advantage unless you pay off the mortgage in less than six years. If it will take longer to pay off your home, then pay your closing costs up front. The break-even point on your loan will be different, so always do the math first.

Save Even More With Expert Advice

It’s just as important to get a great deal on your home as it is to save big on your mortgage. One of Dave’s real estate Endorsed Local Providers (ELPs) can save you time and money when you’re in the market to buy or sell your home. Contact your ELP today!

More from the Blog

Fall Fun for the Budget-Conscious Family

Since Dave Ramsey’s Facebook fans always have great ideas to share, we asked them how they enjoy fall activities without spending a fortune.

5 Leadership Lessons From Football Coaches

Some of the greatest leaders you’ll ever meet are football coaches. Here's a list of our top five.

Everything You Need to Know About Money in 20 Quick Tips

When it comes to money, we can all benefit from a few quick tips. Check out these 20 quick money lessons that might just transform your life.

7 Life Lessons from Truett Cathy

In honor of Truett Cathy’s life, here are seven principles he consistently demonstrated through the years—guidelines that will work in making a living and in building a life.

One Mom’s Secret to Paying Cash for a Home

Fourteen years ago, Lorena Mejia was a single mom working three jobs a day to pay a mortgage she could barely afford. Today, she’s the proud owner of a four-bedroom home she paid cash for.

6 Tactics of a Used Car Salesman

What are some of the most common sales tactics used on a car lot today? Learn how you can avoid these strategies and drive away with a car that fits your family and your budget.