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No Closing Cost Mortgage Loans and How They Work
A big hurdle to overcome before the completion of a mortgage, whether first of second, is paying the closing costs. This is because it usually works out to an amount much above the expectations of the homeowner. All through the loan period he is not exposed to these costs. Just when he thinks that his woes are over, he is faced with a payment of nearly five to six percent of the mortgage value, before the mortgage is finally cleared off.
To a prospective borrower who is aware of this, a no closing cost loan appears to be very attractive. This option relieves him of the pain involved with paying closing costs. But, there is a big misunderstanding with respect to the way these loans workout in the long run. Even though they are touted as free, in fact they are not free.
When compared to the mortgages where the mortgagee pays the closing costs, these mortgages carry a much higher rate of interest. Typically, the rate would be about a quarter percent higher than the others. Lenders rework this extra interest as Yield Spread Premium that acts as a fund to pay off closing costs.
Now if this is calculated taking into account the entire period over which the loan is to be repaid, it is observed that the mortgage loan that requires closing costs to be paid by the borrower is cheaper, even with the closing costs added to the total interest paid. The no closing cost loan is a costlier option with higher rate of interest paid over a long period of time.
Whether or not to consider a no closing cost second mortgage loan depends on the situation. If you intend to payoff the mortgage within a short time, it would be best to take advantage of the no closing cost option. You would be paying the high interest only for a short time and benefit from the ‘no closing costs’, not having to shell out thousands of dollars and lessening you ownership costs.
See our other recommended resources:
No Closing Cost Mortgages - Are They a Bad Deal?
15 Ways To Save Money on Your Next Mortgage Loan
Source: www.articlesbase.com