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
The standards imposed by lenders in determining whether a borrower can be approved for a loan. These standards are more comprehensive than qualification requirements in that they include ...
An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. A short sale is an alternative to ...
Same as term Negative Points: Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a lender might quote the following prices: 8%/0 points, ...
The date on which the closing occurs. On a purchase transaction, there is no financial advantage to the buyer/borrower in closing on any day of the month, as compared to any other day. ...
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 lender who specializes in lending to sub-prime borrowers. ...
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrowers delinquency. ...
An option attached to a mortgage, which allows the borrower to pay only the interest for some period. A mortgage is 'interest only' if the monthly mortgage payment does not include any ...
A provision of a loan contract stipulating that if the property is sold the loan balance must be repaid. A mortgage containing a due-on-sale clause is not assumable. This prevents a home ...
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