No-Fee Mortgage Definition

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No-Fee Mortgage Definition

What Is a No-Fee Mortgage?

When a lender waives fees for the mortgage application, appraisal, underwriting, processing, private mortgage insurance, and other third-party closing expenses, it is known as a no-fee mortgage. Instead, a higher interest rate associated with the mortgage may incorporate these costs.

Key Takeaways

  • Traditional closing charges and lender fees that are assessed at or before the closing are not a part of a no-fee mortgage.
  • No-fee loans, however, could “package” these expenses into a somewhat higher interest rate that is paid over the course of the loan.
  • Because of this, homeowners should weigh the short-term advantage of selecting a no-fee mortgage against the long-term expense.

Understanding No-Fee Mortgages

The interest rate of a no-fee mortgage includes the costs a bank would ordinarily impose. Many closing expenses and other fees are paid for up front by the lender, who will charge a somewhat higher interest rate over the course of the loan. This results in a higher monthly payment for the borrower, but a lower upfront cash need for the buyer in addition to the down payment.

Lenders have varying no-fee policies. Even though a mortgage is advertised as “no charge,” the majority of lenders won’t pay certain taxes or attorney fees (like transfer taxes, for example). Additionally, private mortgage insurance and flood insurance are often excluded.

When it comes to no-cost mortgages, lenders could also stipulate that borrowers must keep the loan for a certain amount of time or else face an early repayment or cancellation charge. Making payments earlier than expected may result in a prepayment penalty from the lender. If the loan is not concluded by a specific date, the bank may demand that closing charges be reimbursed. These regulations aid in preserving the bank’s profit.

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Only if you intend to retain the mortgage for a few years does a no-fee mortgage make financial sense for borrowers. While borrowers may initially save money on closing fees, over the course of a 30-year mortgage, they will end up spending thousands of dollars more in interest.

No-Fee Mortgage Example

Consider a mortgage applicant who requests a loan for $500,000 with a 30-year fixed-rate term. Traditional mortgages from Bank #1 are available with a 4.5% fixed interest rate and $3,000 in closing expenses. A no-fee mortgage with a 5% fixed rate and no closing expenses is provided by Bank #2.

With Bank #1, the recurring payment would be $2,533. It would cost $2,684, or $151 more each month, with Bank #2. The borrower will have given Bank #2 $3,000 in installments over less than two years, which will be sufficient to satisfy the closing fees. Following that, the increased interest rate brings in an extra $150 each month for the bank.

The borrower would pay Bank #2 $54,000 more over the course of 30 years compared to the loan from Bank #1. The overall cost of the loan will go down if the mortgage is held for a shorter amount of time. The homeowner could refinance at a reduced rate if interest rates drop. However, if interest rates increase or property values decrease, refinancing would not be an option.

A mortgage calculator is a useful tool for comparing these expenses.

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