What is a No-Cost Mortgage?

No-cost mortgage is a mortgage that purports not to charge any fees when the mortgage is taken out. In reality, the fees are always there. It's just that with no-cost mortgages, they are folded into regular mortgage payments. While borrowers may save some money on the short term, on the long run, they would have to pay just as much, if not more, as they would with traditional mortgages.

How No-Cost Mortgages Work

When taking out a mortgage, a borrower has to pay several different fees. Together, they can add up costing the borrower up to several thousand dollars. Different lenders charge different types of fees at different rates. If there is a broker involved, he or she can impose fees of their own. They can include:

  • Appraisal Fees - the costs of appraising a home a borrower wants to purchase.
  • Underwriting Fees - fees that lenders charge for closing, underwriting and funding the loan.
  • Origination Fees -  fees that the lender's broker charges for his or her services.
  • Processing Fees - fees charged when a lender's broker hires someone else to process mortgage-related paperwork.

In no-cost mortgages, most, if not all of the above fees are eliminated, Since processing the mortgage still costs lenders money, they increase mortgage payments to make up for the loss. The resulting mortgages have higher interest rates then ordinary mortgages. This isn't much of a problem if the borrower only holds the mortgage for a few years. However, the longer he or she holds the mortgage, the more money it winds up costing,