The Price of a ‘No-Cost’ Loan

Loan Coins

HOME buyers concerned about high closing costs in this tight economy might be tempted by a type of loan that requires no cash outlay in exchange for paying a higher interest rate, especially because rates are already at historically low levels.

But these “zero-cost” or “no-cost” financing deals, as they’re known, could end up costing a borrower dearly over time, some mortgage experts warn.

Unlike some similar loans, which don’t require an out-of-pocket outlay but tack on the thousands of dollars in closing costs to the balance, zero- and no-cost loans typically add a half percentage point or so to the rate while not increasing the mortgage balance.

The third-party fees — for the appraisal, credit report, title insurance, recording, and, if you use one, mortgage broker — are paid by the lender. The fees, including how much the broker is making on the loan, are disclosed on the closing statement.

But if you bypass a broker and go straight to the lender there is less transparency, because the loan officer doesn’t have to disclose how much the lender is making off the loan.