A “no fee” mortgage sounds perfect, so you should always take it, right? Not so fast! When something sounds too good to be true, it usually is. This article will briefly discuss the hidden costs of a no fee mortgage.
There is no such thing as a free lunch, and that applies to “no fee” mortgages vis-à-vis higher interest rates. Sure, you don’t pay fees on your mortgage, but you pay significantly more in interest over the lifetime of the loan.
Example: You purchase a $200,000 home and pay (between 2% and 5% of the loan amount in fees – $7,500 if you are paying fees) lenders fees of approximately $7,500. The no fee mortgage has an interest rate of 4.5% and the standard mortgage has an interest rate of 4%. Despite the fact that you are paying an additional $7,500 in lender’s fees, you ultimately save $13,000 over the lifetime of the loan by choosing the route that has you pay fees. Many borrowers are blinded by the short-term savings and forget that they will essentially be throwing money away in the future.
As a natural follow-up to the previous point, the longer the life of the loan, the less likely it is that a no-fee mortgage (and the increased interest rate) is in your best interest. Short-term loans are really the only place where a no-fee mortgage can be beneficial (e.g., you’re planning on flipping the house quickly, which means the interest rate doesn’t matter too much). If there is one take away from this article it’s this: when considering a “no fee” mortgage, the golden rule is long-term bad, short-term good.
At the Chernov Team we understand that knowledge is power, and knowledge of how lenders fool short-sighted borrowers into paying significantly more over the lifetime of their loans is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.
