NO COST MORTGAGES

No-cost mortgages don´t eliminate costs, they convert them from costs paid upfront to costs paid over time. Other things the same, no-cost mortgages carry higher interest rates, which may be better for some borrowers, but not for others. At the same time, no-cost mortgages are easier to shop because of their simplicity, so the borrower may get a better deal.

Making the decision to refinance your home and using the funds for investment purposes be it for real estate, stocks, bonds, trust deeds, lending, or whatever, you should be aware of the potential loan program that may be offered to you referred to as a "No Cost Loan" refinance. Simply stated, the loan officer may tell you that a no cost loan is one where you pay no closing costs including no points or fees whatsoever.

This is true. There are usually no appraisal fees, no credit report fees, and none of those so-called "junk" fees to be paid by the borrower. But you need to ask yourself this, "Who is going to pay for these costs?" We already know that banks make profits and that loan officers get paid (salaries or commissions), loan processors and loan underwriters do not work free, so the big question is, "Whose money is being used to pay these costs anyway?"

The No Cost Loan is not a scam; they really do exist and have for many years. During the early 1990´s some homeowners refinanced multiple times as the interest rates decreased in a downward spiral so that they could lower their monthly mortgage payments knowing that there were no costs to them. What happened was that the old formula of not refinancing until there was a 2% difference in interest rates because of the closing costs factors was no loner a major concern for most homeowners, but having lower monthly mortgage payments was.

Let´s assume for a moment that the current interest rate today for a 30-year mortgage is 6.50 % and the loan fees were 2 points (Points are a cost frequently charged on mortgages. Payment time is typically the day you actually obtain mortgage money. The Internal Revenue Service has ruled points are deductible as interest expense in the year paid. Points can be charged on any type of loan. Points are expressed as a percent, i.e., 2 points which is expressed as a decimal .02. Two points on a $100,000 loan is (.02 times $100,000) or $2,00.00. Points are usually collected at closing and may be paid by the borrower or the home seller, or may be split between them). This sometimes is referred to as "Negative" points because it a direct cost to you, the borrower, and is not inclusive to the actual loan.

The reasoning behind the no cost loan is based on rebate pricing (Compensation received from wholesale lender, which can be used to cover closing costs, or as a refund to the borrower. Loans with rebates often carry higher interest rates than loans with points) and yield spreads (RESPA requires the disclosure of yield spreads or sometimes referred to as referral fees. At closing, these would be listed as "yield spread premiums," "service release premiums," "yield differentials." "Rate participation fee." "Service release fee" or "par-plus pricing." What it really means is that there is not any money coming out of your pocket now, but you will have higher monthly payments so the money is really coming from the future payments made with the new mortgage.

The main benefit of a no-cost loan (zero-points/zero-fee loan) is that there is no out of pocket expenses and as a result, should the interest rate decrease in the future you could refinance to lower your mortgage payments again. If you were to pay the closing costs out of pocket, it may not benefit you to refinance should rate decrease only slightly.

The no-cost loans are also very advantageous for the borrower with an adjustable rate mortgage to consider when refinancing and elects paying the lower teaser rates to lower his payments.

The biggest disadvantage to the no-cost loan is that you are paying a higher interest rate, which means your payments are higher. You have to analyze the payments to costs to see what the break even point would be to see if it really is going to be beneficial for you or not.

A conventional loan is a real estate loan not involving Government participation by way of insurance, and most conventional loans have restrictions to loan amounts.

Conventional loans (FHA and VA loans are included) offer Fixed rate mortgages (interest rate is fixed for the life of the loan, and payments are fixed for the life of the loan. Payments of Principal and Interest do not change).

Fixed rate mortgages offer terms of 10, 15, 20 and 30 years. Usually, on terms less than 30 years, the payments will be slightly higher, will be paid off sooner, and the interest rates are typically lower.

Lenders also offer Adjustable Rate Mortgages (ARM) that usually have lower start rates, easier qualifying ratio´s (to understand the ratio´s, and some of them offer a conversion option (allows you to convert from an adjustable rate mortgage to a fixed rate mortgage based on certain conditions being meet from the lender)."

Some types of indexes used in the lending industry and what they mean:

CD-Indexed ARM (Certificate of Deposit) adjusts to the Certificate of Deposit Index (CD) after the first 6 months of your mortgage payment. This loan program usually has a 1% payment adjustment each adjustment period, with a lifetime payment adjustment of 6%.

Treasury-Indexed ARMS are indexed to the weekly average yield of the U.S. Treasury securities adjusted to a consistent maturity of six (6) months, one (1) year, or three (3) years. The ARM program selected by you will determine the payment adjustment periods and adjustment caps (either 6 months, 1 year, or 3 years).

Cost-of-Funds Indexed ARM (COFi) are indexed to the actual cost that a group of institutions pay to borrow money. One of the more popular COFi ARMS is the 11 TH District Cost of Funds. These ARMS can adjust every six (6) months or ever one (1) year and the adjustment caps and lifetime rate caps vary (depends on the COFi ARM you select).

LIBOR-Based ARM is the "London Interbank Offered Rate " (LIBOR). This interest rate index is the rate which the international banks lend and borrow money throughout the London Interbank market. LIBOR-Based Arms offer six (6) month adjustments and typically offers a one (1%) percent interest rate adjustment every six (6) months with a five or six percent maximum life time rate cap.

Fixed-ARM loans are loan programs that usually offer lower fixed interest rate loan programs (lower then the typical conventional, FHA or VA) and this type of loan offers either a "BALLOON" note program, or a conversion to an adjustable rate mortgage. The terms for both the programs above are for terms of three years, five years, seven years, or ten year fixed rate periods.

At the end of the terms specified, the unpaid balance is all due and payable (in the case of a "BALLOON" loan) and or, if the loan program selected is a fixed rate ARM, the unpaid balance is (remainder of the term) is converted to an ARM, based on the index, margin, note rate, cap rate and adjustment period agreed upon in the original note, plus an adjustment based on the index factor at the time of the conversion.