When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible, and this explains the allure of no-fee mortgages. But while a no-fee mortgage might sound appealing—thanks to a lack of lender fees or closing costs—they come with their own set of pros and cons.
They almost always carry a higher interest rate
That means that over time the additional interest you wind up paying will be more expensive than the fees you pay upfront. So, your first question should be, “What is my rate if I pay the fees?” For instance, since closing costs are typically 2 percent to 5 percent of the loan amount, you can expect to pay about $7,500 in lender fees on a $200,000 loan. If the interest rate is 4 percent, and a no-fee mortgage has a rate of 4.5 percent, you will save more than $13,000 during the course of a regular loan. So, while you will have saved $7,500 in the short term, you’ll wind up paying more due to a higher interest rate over the long term. Always weigh it out with your financial situation.
No-fee mortgage options should only be used when a short-term loan is absolutely necessary
Before you start calculating the money that you think you might save with a no-fee mortgage, consider your long-term financial strategy. A no-fee mortgage might be a smart tactic if you don’t plan to stay in one place for a long time or plan to refinance quickly. If you’re looking to move in a year or two, or think rates might be lower and you might refinance again, then you’ll want to minimize your costs. If you think you’re going to be in the loan for 10 years, however, then you’ll want to pay more upfront for a lower rate.
There will be some additional costs
The cost for credit reports, as well as recording and flood-service fees, sometimes aren’t included in a no-fee promise, but they are minimal. The home appraisal also will always be paid by the consumer, because the appraiser is considered a third-party vendor and must be paid separately. All of the other costs, including property taxes, and homeowner’s and private mortgage insurance, will all still be paid by the borrower. It’s important to ask if any additional fees are required, as it varies from lender to lender, and state to state. The last thing you want is a huge surprise.
When does a no-fee mortgage make sense?
For borrowers who want to save cash right now, but don’t mind paying more over a long time frame, a no-fee mortgage could be the right fit. If your plan is long-term, it will almost always make more sense to pay the closing costs and take a lower rate. If your plan is short-term, then no closing costs and paying more interest over a short period of time will be more cost-effective.
