No-Cost Mortgage
Definition of "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
Same as term housing expense. The sum of the monthly mortgage payment, hazard insurance, property taxes, and homeowner association fees. Housing expense is sometimes referred to as PITI, ...
After reaching a certain annual income, you might be interested in finding the definition of a jumbo mortgage. What is a jumbo loan? It is something like a mortgage with ...
Markets in which mortgages or mortgage-backed securities are bought and sold. 'Whole Loan' Markets Versus Securities Markets: Secondary mortgage markets are of two general types. 'Whole ...
Using a brokers time and expertise to become informed and creditworthy, then jumping to the Internet to get the loan. ...
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include upfront cash ...
A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate. ...
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, ...
Equations used to derive common measures used in the mortgage market, such as monthly payment, balance, and APR. ...
Charging unwary borrowers interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market. ...
Have a question or comment?
We're here to help.