Are There Really No Cost Home Loans?

By Sheryl Landrum Columnist

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For borrowers shopping for a new home loan, it is very disappointing to learn how expensive a refinance or new home purchase loan can be. There are lender fees, appraisal fees, title and escrow fees, prepaid interest and collections for impounds or prepaid insurance as well as other miscellaneous costs. No wonder borrowers jump at the opportunity to work with lenders that offer no cost mortgages. But, is a no cost home loan the best home loan product for you?

If you are considering a no cost home mortgage loan, make sure you talk to more than one lender and always ask for a Good Faith Estimate (GFE) and a Truth-in-Lending Disclosure (TIL). There are always costs when you get a new home loan; if a lender or loan officer is willing to absorb these costs, they are making the mortgage loan cost differential in another area--normally the interest rate they offer you and/or in the terms of the home mortgage loan itself.

Your no cost home loan probably comes with a higher interest rate than if you paid for closing costs. Another way borrowers pay the hidden costs of a no-cost mortgage are through prepayment penalties or through a high margin attached to their index if they are looking at an adjustable rate mortgage (ARM). Your GFE breaks down the costs of your home loan and your TIL spells out the interest rate, margin and index, loan terms, and discloses any prepayment penalties that may be applicable.

Remember, little in life is free. If you are considering a no-cost home mortgage loan, compare mortgage terms and lenders and protect yourself from hidden costs as well.

About the Author
Sheryl Landrum is a Senior Loan Officer with Charter Funding, Inc. in Carlsbad, California and a freelance writer on mortgage issues.

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