No Cost Mortgage Loans - Good or Bad?

Mortgage and Lending with Cambria Mortgage NMLS 274132

No Closing Cost Mortgage Refinance? BUYER BEWARE?
Good or Bad Idea? YOU DECIDE after reading thisJoe Metzler, MMS - (651) 552-3681...

St Paul, MN: Mortgage interest rates are currently at historic lows. Your mailbox and the airwaves have become full with mortgage companies competing for your business. Many of these advertisements are for "No Cost" or "No Lender Fee" loans.

Are No Cost Loans a Deal? For most people, usually not.

One of the most confusing areas for consumers in a mortgage loan transaction are closing costs. Here I'll explain the advantages and disadvantages of the highly advertised "no closing cost" or "low cost "loans.

First and foremost, there is no such thing as a NO Closing Cost Loan! Everyone knows there are costs associated with getting a mortgage loan; appraisal, credit reports, state taxes, county recording fees, title companies fees, lender fees, escrows, and more. Someone has to pay these fees, and it is always YOU. How you pay them is what this article tries to explain.

Homeowners in Minneapolis, St Paul, Madison, Milwaukee, and throughout all of Minnesota and Wisconsin need to understand that in a no lender fee or no closing cost mortgage loan, the lender simply uses "negative" points to offset your costs. In the example below, by having the 5.00% rate (versus the 4.5% rate), you can reduce (or offset through interest rate) $5,000 of closing costs. By choosing this option, it appear as if you saved thousands in closing costs. GREAT! But while lower costs always sounds good, you now have a significantly higher interest rate! OK, now what?

No matter what anyone says, a zero cost, or no lender fee loan is NOT automatically a great deal. Although it may sound so much better than adding thousands in closing fees to your principal balance, you have to analyze each individual loan and client situation to determine the benefits. Many lenders speak highly of the "thousands of dollars" you save in fees. They never discuss the fact that you may spend significantly more in interest over the full life of the loan than you ever saved in up-front closing costs! In the example below, you can pay $12,578 MORE for your no cost loan!

FACT: In a refinance loan, the vast majority of people roll the closing costs into the new loan.

View the following chart, then call us. We'll run your personal numbers. Then you can decide if a no closing cost home loan is right or wrong for you.

Deal or No Deal? Most Common /
OK short-term
BAD long-term
Most CommonLow Cost Option
OK short-term
Very BAD long-term

Loan Amount $205,000 $203,000 $200,000
Interest Rate 4.50% 4.75% 5.00%
Principal & Interest Payment $1,038 (+$20) $1,058 (+ $45) $1,073 (+$60)
Closing Costs On Estimate $5,000 $3,000 $0
Out of Pocket Closing Cost Paid $0 - all rolled in loan $0. $2k in rate, $3k in loan $0. $5k in rate
Interest Paid over 5 years $48,192 $50,271 $52,054
Interest Paid over 15 years $121,743 $127,744 $133,002
Interest Paid over 30 years $172,932 ($373,935) $182,215 $190,491 ($386,513)

OK, so you are looking at the math, and maybe say "this isn't so bad", especially if you are in the home under 5-years.

First time home   buyer assistance applicationBut wait, here is a giant "Gotcha"

ANY LENDER who sells the no cost mortgage simultaneously sells a client into becoming a “serial refinancer,” which is not looking out for the client. They are “churning” the client and raking in fees year after year by fooling you into refinancing constantly at "no cost", but always moving you BACKWARDS into a new 30-year loan. How many times have YOU gone backwards?

Factor in the monthly payments on all those additional "backward years" on all those "no cost" refinances, and that "biggest no brainer in history" no closing cost loan has actually cost you dearly.

Churning of home owner mortgages is illegal in most states

I hope this article has helped you to understand the varied measures used to determine the advantages and disadvantages of zero cost loans. Each borrower is different, and the evaluations must be made on a case-by-case basis. As you can see, there are many factors to consider when looking at the available options. With us as your personal Mortgage Consultants, we will be able to answer all of your questions, outline the costs and benefits, and even give you a few new ones to consider!

While everyone’s individual financial situation varies, let us show you the math so you make the correct choice. Of course, if a zero cost loan makes sense for your case, we will be happy to do one for you.


We lend in MN and WI ONLY

(C) 2011 - Joe Metzler - Mortgages Unlimited, St Paul, MN #274132. Re-blog but do not steal!


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Greg Miller
Ruoff Home Mortgage - Sarasota, FL
Florida Home Loans - Conventional,FHA,USDA,VA

Well informed chart Joseph. In almost every case the borrower would be better off to pay the closing costs and get the lowest rate. Nothing is for free.

Feb 03, 2011 08:31 AM #1
Mark Nehs
Mortgage Loan Officer Waukesha Wisconsin - Pewaukee, WI


Agreed.  This whole no cost thing comes up all the time.  People will ask/demand a no cost loan and I say sure and they seem impressed with themselves.  But, I say, not sure if it will make the most sense for you.  I go on to tell them you can as low as rate as you want or no costs or anywhere in between you decide. 

Nice explanation.

Feb 04, 2011 01:31 PM #2
Nick Krehnke 425-202-5655
All Square Mortgage INC. - Seattle, WA
"Your Trusted Friend in the Home Loan Biz" :)

Joseph, I disagree.

Say you close loans for 2 borrowers.Borrower #1 paid $5,000 in closing costs and borrower #2 paid $0 closing costs.6 months later, they are both watching the news on TV when it talks about how much rates have dropped. They both call you to mention this and ask if there is anything you can do for them. So what do you say to them? One of them is going to have a bit of buyers remorse, and it isn't the no cost borrower.

My point is, when you pay closing costs, there ain't no going back, at funding that money is gone. In your example above, you are paying $5,000 to save $38 per month. That is a breakeven of 131 months...that's is 11 years!!

So if we look at the past 11 years the refi opportunity was big in 2003, 2008, 2009, 2010. I have several friends in my database that are at 4% on 30 year fixed and didn't have a single penny added to their loan balance to get it.

Feb 09, 2011 05:35 AM #3
Joseph Metzler
Cambria Mortgage - Saint Paul, MN
Sr Loan Officer

My post said "While everyone’s individual financial situation varies, let us show you the math so you make the correct choice."

Sometimes a no closing cost mortgage does make sense. More often than not, it doesn't.

Your counter argument is skewed. Borrower1 and Borrower2 are NOT EQUAL. Borrower1 paid costs and his mortgage interest rate is therefore 1/2 percent LOWER than the no closing cost loan Borrower2.

If mortgage interest rates drop 1/2%, Borrower1 needs to do nothing, while Borrower2 needs to refinance to get the same rate. Borrower2 needs to add 6 months or more back onto the term of his loan, and has effectively gone backwards 6 months.

That doesn't sound very smart to me...

Again, each individual and siuation is different. I simply point out the facts consumers should consider before automatically assuming one option is better or worse than the other.


Feb 09, 2011 05:47 AM #4
Nick Krehnke 425-202-5655
All Square Mortgage INC. - Seattle, WA
"Your Trusted Friend in the Home Loan Biz" :)

If rates drop, they all drop, regardless if you are selling at a discount, par or rebate pricing. As far as going backwards on the term, I agree with you there, but it depends on what the borrower wants, lower payment or faster payoff. A 6 month hit for a 1/4% drop would still be lower payoff long or short term.

I just did a loan they were into a 30 year approx 6 years at about 5.25% I did a 20 year at 4.375% for no costs. Their payment was almost the same, but they knocked off 4 years. 

I just like fact that if the market drops a tiny bit, say a 1/4%, the no cost folks can take advantage of it, while the closing costs folks can't. I just seems I don't have the buyer remorse if rates do drop compared to when I sold at par pricing.

As you pointed out on churning, you can't do anything for a minimum of 6 payments, and even then I still have to do net tangible benefit paperwork.

Even if we may disagree on this point, I still like your article very much :) 

Feb 09, 2011 11:01 AM #5
Dave Sullivan
Real Estate One - Birmingham, MI
Michigan Realtor with an investor viewpoint


Jan 02, 2012 12:41 AM #7
Darren Copeland
Leader One Financial - Lee's Summit, MO
Darren Copeland

great article! we find so many people who get confused on the difference between what 100% financing means and no closing costs...

great clarifying post!

Jun 26, 2013 01:13 AM #8
Teresa Tims
TDR Mortgage & Real Estate Group - Rancho Cucamonga, CA
Teresa Tims

Great :)

Aug 30, 2013 12:42 AM #9
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