No-Cost Mortgages waive the initial closing costs by making a repayment structure for those costs into the interest payments on a mortgage loan. Closing costs can range from 2%-5% of the total cost of the home, and include attorney fees, underwriting fees, application fees, and so on.
These costs are deferred and are paid in the form of additional interest on the loan. Closing costs are separate from down-payments of equity, and are a miscellaneous hodgepodge of a wide range of fees associated with closing a mortgage deal. These costs are sometimes covered by the seller, but most often they are paid by the buyer.
These costs might include application fees, mortgage insurance premiums, attorney fees, inspection fees, and a long list of other possible fees. People sometimes are given the option to close the deal without paying these fees up-front in exchange for a slightly higher interest rate on their mortgage loan.
The fees will still be paid, but they’ll be spread out over time, and the bank will usually come out on top with the higher rate of interest. Since closing costs alone can around $5,000, many homebuyers take this option to give them a little more liquidity in the near-term to improve the purchased home and perhaps buy suitable furniture.
If the home is only going to be lived in for a few years, this may be the best option, but each borrower will have to compare all of the available options in each situation. Mortgage companies can then possibly sell the mortgage in the secondary market and receive a lump sum for a higher interest rate mortgage, which is probably better than letting the buyer cover closing costs.