What Is a No-Cost Mortgage?

A no-cost mortgage is a type of mortgage option that generally requires the borrower to pay less in the way of up-front costs. Typically, those costs are included in the total amount financed by the lender, which means that the borrower is incrementally paying off those costs over the life of the mortgage loan. In return for this type of service, the lender will normally assess a higher rate of interest on the outstanding balance, which means that the borrower ultimately pays more in order to purchase the real estate involved.

One of the benefits of a no-cost mortgage is the ability to forgo the need to pay various types of expenses at the onset of a mortgage arrangement. Depending on laws and regulations that govern the sale and financing or property within the jurisdiction in which the transaction is occurring, it may be possible to bundle closing costs and a number of other fees into the total amount of the financing. Lenders will generally be very specific about what type of fees and costs can be managed in this manner, and what expenses the borrower will have to absorb on the front end in order to receive the financing.

A negative aspect of a no-cost mortgage is that the homeowner will, over time, pay interest on all those costs and expenses that were bundled into the total amount borrowed from the lender. In addition, the lender is highly likely to charge a higher rate of interest on the loan itself, a factor that further inflates the amount that the borrower pays back over the life of the mortgage. Depending on the total amount of the loan, going with a no-cost mortgage instead of paying those costs and fees on the front end can be very expensive.

While a no-cost mortgage is not always the best approach, there are situations in which using this method of financing may be in the best interests of the buyer. This is particularly true when the idea is to acquire the property and hold onto it for no more than a few years. Assuming that the property experiences a significant appreciation in value, there is a good chance that it can be sold for enough to totally settle the original debt plus net the buyer a substantial profit. When this is the case, the additional costs from the higher interest rate and the greater principal borrowed are less likely to affect the borrower, since the loan is paid off early, and does not remain in place for 20 to 30 years.