No-Cost Mortgage
A mortgage on which all settlement costs except per diem interest and escrows are paid by the lender and/or the home seller. A no-cost mortgage should be distinguished from a 'no-points mortgage,' which will have other settlement costs, and a 'no-cash-outlays mortgage,' on which settlement costs are added to the loan balance. Calling the latter 'no-cost' is extremely deceptive. A true no-cost mortgage is one where the interest rate is high enough to command a rebate from the lender that covers the closing costs (except for per diem interest and escrows, which borrowers always pay). In general, they make sense only for borrowers who expect to hold their mortgages for no more than five years. A borrower with a longer time horizon and who has the cash to pay settlement costs ought to avoid the no-cost option. Lenders demand a high interest rate for rebates because they assume they won't enjoy it very long. The average life of high-interest-rate loans is short. A borrower who pays the high rate for a long time gets a bad deal. It is akin to a healthy person buying life insurance from a company that mainly insures diabetics and smokers and prices its insurance accordingly. The critical number for potential borrowers is the 'break-even period' (BEP) for a no-cost loan, relative to the same loan with a lower rate on which the borrower pays the costs. Over periods shorter than the BEP, the no-cost loan has lower costs. Beyond the BEP, the no-cost loan has higher costs. One important side benefit of no-cost mortgages is that shopping for them is relatively easy. The shopper needs quotes on only one price dimension the interest rate.
Popular Mortgage Terms
Owner financing or seller financing is a trending real estate concept among homebuyers and sellers. The seller reveals in their asset’s advertising or listing if buyers can purchase ...
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity, which is the period over which the loan balance must be paid in ...
The sum of the monthly mortgage payment, hazard insurance, property taxes, and homeowner association fees. Housing expense is sometimes referred to as PITI, standing for principal, ...
You’ve certainly heard a lot about Credit Score and might even have a general idea about its meaning, but if you came to this page you still have some doubts about what is a credit ...
Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's Qualification Requirements and also its Underwriting Requirements. In some cases, ...
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, ...
Cost-of-Funds Index, one of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. ...
A borrower who must use tax returns to document income rather than information provided by an employer. ...
A particular computerized system for doing automated underwriting. Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae's 'Desktop ...
Have a question or comment?
We're here to help.