What Is a No-Fee Mortgage?

A no-fee mortgage is when a lender charges no fees for a mortgage application, appraisal, underwriting, processing, private mortgage insurance, and other third-party closing costs. Instead, these fees may be included in a h🌌igher interest rate attached to the mortgage.

Understanding No-Fee Mortgages

The fees a bank would typically charge are built into the interest rate of a no-fee mortgage. The lender covers many closing costs and fees up front while charging a slightly higher 澳洲幸运5开奖号码历史查询:interest rate throughout the loan. This increases the borrower's monthly payment but decreases the cash the buyer needs to provide upfront in addition to the 澳洲幸运5开奖号码历史查询:down payment.

No-fee terms vary among mortgage lenders. Even if a mortgage is marketed as "no fee," most lenders will not cover certain taxes (such as transfer taxes) or attorney fees. In addition, flood and 澳洲幸运5开奖号码历史查询:private mortgage insurance often are excluded.

With no-fee mortgages, lenders may also require borrowers to hold the loan for a minimum period, or else they will owe an early repayment or cancellation fee. The lender could charge a 澳洲幸运5开奖号码历史查询:prepayment penalty for making payments ahead of schedule. The bank may require closing costs to be repaid should the loan not be closed before a specific date. These policies help to protect the ꧒bank's profit.

For borrowers, a no-fee mortgage makes financial sense only if you plan to hold the mortgage for a few years. While borrowers can save on closing costs in the short term, they'll end up paying thousands of dollars in extra interest over a 30-year mortgage.

No-Fee Mortgage Example

Take, for example, a mortgage applicant who borrows $500,000 with a 30-year, fixed-rate term. Bank #1 offers a traditional mortgage at a 4.5% 澳洲幸运5开奖号码历史查询:fixed interest rate and $3,000 in closing costs. Bank #2 offe♌rs a no-fee mortgage a💃t 5% fixed and zero closing costs.

The monthly payment with Bank #1 would be $2,533. With Bank #2, it would be $2,684ღ, or $151 more each month. After less than two years of payments with Bank #2, the borrower will have paid the bank $3,000—enou﷽gh to cover the closing costs. After that, the bank earns an additional $150 each month thanks to the higher interest rate.

Over 30 years, the borrower would pay Bank #2 $54,000 more than the loan from Bank #1. However, holding the mortgage for a shorter period will decrease the total cost of the loan. If interest rates fall, the homeowner could 澳洲幸运5开奖号码历史查询:refinance at a lower rate. However, refinancing would not be an option if rates rise or property values decline.

A 澳洲幸运5开奖号码历史查询:mortgage calculator is a good resource for comparing these costs.

The Bottom Line

If you're not planning to stay in the home you're purchasing for more than a few years, and you don't want to put as much down when you close, a no-fee mortgage might make sense for you. You'll pay more in interest over the life of the loan, but if you don't plan on staying in the home until the mortgage is paid off, that won't be a concern.