I have been asked many times what a No Cost mortgage loan is. This is up to interpretation as every companies seem to have a different answer. In my opinion and Coastal Mortgage and
What Is A NO COST Loan
I have been asked many times what a No Cost mortgage loan is. This is up to interpretation as every companies seem to have a different answer. In my opinion and Coastal Mortgage and Realty's opinion, a No Cost loan is one that covers the Non - recurring closing costs + Recurring closing costs(basically any money due after the down payment or payoff in a refinance situation). Non recurring fees are Lender fees, Broker Fees(if any), Processing Fees, Escrow Fees, Title Fees, Appraisal Fees. These are all 1 time fees that the buyer or borrower would only pay if they went through with the transaction. These are not the only costs associated with a mortgage. Recurring closing costs are Pro-rated interest, homeowner's insurance, and property taxes. The can add up to even more than the non-recurring costs, especially in areas where the property taxes are high and especially when a borrower impounds the insurance and taxes. When a borrower chooses to set up an impound account or escrow account, the lender will collect an estimated 14 months of insurance payments as well as 4-8 months of property taxes. This way the homeowner pays 1/12 every month and they do not receive a large insurance bill each year or a large property tax bill twice a year. As far as the pro-rated interest being collected, this will adjust according to the day of the month the loan closes. Whether you are refinancing or purchasing a new home, the interest is collected until the end of the month. Then you skip that payment and your first mortgage payment is due the following month. Ex: you close on a home 5/15. You will skip the 6/1 payment and your first mortgage payment will be due 7/1.
Now the other part about the NO COST mortgage is that lender's offer HUGE credits to help off set the non-recurring closing costs + the recurring closing costs. These can easily add up to around 2% of the loan balance. When comparing interest rates and fees, we show our clients the No Cost rate that covers not only the traditional closing costs, but also the recurring fees that would be collected. Then we calculate how long it will take you to recoup any money spent compared to the No Cost option. If you are unable to recoup the fees in 4-5 years, we usually recommend the No Cost option. Every client has a unique situation, so we go through an in depth evaluation before advising what interest rate is best.