Some lenders like no-cost loans. Even banks, which offer other types of loans and refinance mortgages offer no-cost loans. As the name suggests, these loan offerings do not have closing costs. This means that there are no documentation, appraisal, or any other fees involved, as the lender will pay it for the borrower.
This no extra expense option sounds very good, but to make up for the lack of upfront fees the lender will charge a higher interest than normal, say, compared to a regular loan. The concept is simple: a no-cost loan has no fees now, but will charge you higher in the long run, or pay fees now, and enjoy lower interest rates.
This means you have to pick between a no-cost loan with higher rates, or the usual loan with lower rates.
The Deciding Factor
The deciding factor is how much expense you can afford, and for home mortgages, for how long you would stay in that home. For example, if you plan to live for more than three years in it, then a regular loan with a lower interest should work well. On the other hand, if you plan to move in two to three years, then the no-cost loan is cheaper.
Understand the Terms
City Creek clarifies that each lender has his unique definition of a no-cost loan, so check with your lender and clarify the terms. Some lenders do not have closing fees, but they extract money in other forms. Understand the terms before you apply for a no-cost loan to avoid any misunderstandings and potentially getting the short end of the stick in the deal.
Great Stop-Gap Option
These no-cost loans are useful in circumstances when you are not sure how long you would stay in a property. You can avail a no-cost loan in such situations and save some money until you have a more concrete moving plan; if you would move, a no-cost loan is worth the risk, but if the home is a permanent residence, you can refinance later.
No-cost loans are great for people without cash on-hand to pay for the various fees upon loan processing. Take care not to confuse this with no-cash loans, which add the settlement costs on the loan amount, unlike the no-cost loan that just charges a higher interest rate.