“No-cost” and “no-fee” loans: you likely see promotions for them all around. Are these loans the real deal, and should you consider one if you’re looking to buy a house or refinance?
The answer is not such a simple one. While there are loans that technically offer no upfront fees, these loans are often misrepresented, and banking regulators have gone after lenders who misrepresent these loans.
While they may sound great at first, the reality is that no-cost and no-fee loans may actually cost the borrower more over the long term because costs are often hidden by rolling them into the new loan through higher principal or interest.
The rates on no-cost loans are usually about 1/2 or 5/8 of a percentage point higher than the "full cost" rate. So how does it work? A typical no-fee loan includes points and all fees in the loan principal, so the borrower does not pay or “see” these expenses at the closing. Instead, the borrower pays them over the life of the loan.
If you are looking to refinance, it may be possible to get a no-cost program that will lower your rate at no expense to you. Today, lenders are paying all closing costs, such as title fees, appraisal fees, and credit report fees. There are no loan fees or points, and nothing is added to your loan balance.
However, many lenders may charge a loan application fee and some restrictions may apply depending on the size of the loan.