How does a "no-cost loan work?
More accurately called a "no upfront
-cost" loan, a "no-cost" loan is a mortgage that wraps the closing costs such as application and credit check fees as well as appraisal and other settlement charges into the loan amount. These expenses are often paid by including the costs into a larger total loan amount and charging a higher interest rate on the whole loan.
The no-cost loan could be a useful alternative for:
- someone short on cash, or
- a homeowner who is refinancing.
Another way to go is to pay the points and any other deductible closing costs in cash at settlement to secure the tax deduction. Usually this also means a lower interest rate, and therefore lower interest cost over the life of the loan.