The Real "Price" of a “No-Cost” Loan

Just a quick mention about my previous post about the show...Last week we talked about the “Keep Your Home California” program.  One of the logistical complications that has caused the delay is the fact that Fannie Mae and Freddie Mac last week instructed their loan servicers to participate in the program, dramatically increasing the number of potentially eligible homeowners.  Will keep you posted on that. . .

This week, we look at the real costs associated with a "no-cost" loan

Some homebuyers who may be concerned about paying high closing costs might be tempted by a “zero-cost” or “no-cost” loan option, which requires no cash outlay, but typically adds a half percentage point to the rate. 

However, some financial consultants say these loans tend to be most beneficial to buyers planning to have the loan for less than five years.

Making sense of the story
    •    One of the primary differences between a no-cost loan and similar loans is that no-cost loans do not tack on closing costs to the balance, but instead increase the rate.

    •    With no-cost loans, third-party fees including the appraisal, credit report, title insurance, recording, and the use of a mortgage broker are paid by the lender.  The fees, including the amount the broker is being paid, are disclosed on the closing statement.

    •    Home buyers who bypass a broker and work directly with a lender may encounter less transparency, as loan officers are not required to disclose the amount the bank is making on the loan.

    •    Borrowers weighing their loan options are advised to use a mortgage amortization calculator to compare the costs for a conventional loan compared with a no-cost loan.  The Federal Reserve provides an amortization calculator on its Web site at www.federalreserve.gov.

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©  Patty Ross, KRXA Radio Show #184  November 12, 2010