Do you like the idea of a no-fee mortgage?

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Of course. Most people do, at least until they learn the cost.

If you’ve seen the ads for no-fee mortgages, you might think they’re just what you need. And for a few people, they are.

However, nothing is really free.

To begin with, “no-fee” doesn’t mean the borrower only needs to come to closing with the down payment funds. Certain costs, such as those for credit reports, recording, flood service, appraisals, inspections, property tax and insurance reserves, and private mortgage insurance are provided by third-party vendors and are paid separately from the lender’s fees.

Some of these costs, such as insurance and property tax deposits, can be covered by rolling them into the loan balance. But then, or course, the borrower will pay interest on those funds.

Next, there’s the trade-off.

No-fee mortgages almost always carry a higher interest rate than you’d pay if you paid the lender’s regular fees. In the long run, that means your loan will cost more if you opt to pay no fees.

As an example: Closing costs across the U.S. are generally 2% to 5% of the loan amount. Taking the middle road, let’s say 3 ½%. On a $200,000 mortgage, that would come to $7,000.

Interest rates go up and down, but for this example we’ll use 4% with fees and 4.5% with no fees.

At 4%, your payment will be $954.83. Raising that by ½% brings it to $1,013.37, or $58.54 per month. Over the life of a 30-year mortgage, it will cost $21,074 – or $14,074 more.

Since it costs more in the long run, why would anyone want a no-fee mortgage?

Because they are sure they’ll want the loan only for a short time. Using the figures in our example, you’d be saving money if you sold or refinanced in less than 10 years.

If you plan to move in just a year or two, saving the fees is a smart move. It’s similarly wise if you know your income and/or credit rating is going to improve or if you believe interest rates will continue to fall, so you plan to refinance in just a couple of years.

It’s always wise to do the calculations, consider your plans, and weigh the pros and cons before making a major decision.

Here at Homewood Mortgage, the Mike Clover Group, we keep our fees on the low end – at about 2%.

As always, we’ll be glad to go over your options with you and do the math so you can make the right decision for your individual situation.

Call us today at 800-223-7409

 

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