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
Interest that is earned but not paid, adding to the amount owed. For example, if the monthly interest due on a loan is $600 and the borrower pays only $500, $100 is added to the amount owed ...
A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a prepayment in full; otherwise, it is a partial ...
The interest rate used to calculate the mortgage payment. The interest rate and the payment rate are often the same, but they need not be. They must be the same if the payment is fully ...
The interest rate adjusted for intra-year compounding. Because interest on a mortgage is calculated monthly, a 6% mortgage actually has a rate of .5% per month. If there were no principal ...
Requirements stipulated by the lender that the ratio of housing expense to borrower income and the ratio of housing expense plus other debt service to borrower income cannot exceed ...
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The lender's risk that, between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling ...
A revers mortgage program administered by Fannie Mae. ...
A federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages. ...
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