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by Terry Light

www.homeloanabc.com

There really is no such thing as a "no-cost" mortgage loan. There are always costs, such as appraisal fees, escrow fees, title insurance fees, document fees, processing fees, flood certification fees, recording fees, notary fees, tax service fees, wire fees, and so on, depending on whether the loan is a purchase or a refinance. The term "no-cost" actually means that your lender is paying the costs of the loan. All a "no cost" loan means is that there is no cost to you, the borrower.

Except that you pay a higher interest rate.

A variation of the no-cost loan is the "no points" loan, or even the "no points, no lender fees" loan. On these loans you pay all the costs associated with buying a house or refinancing, but you do not have to pay the lender associated fees or points. However, since lenders and loan officers do not do anything for free, the profit has to come from somewhere.

So where does it come from?

First, you have to understand how loans are priced and how mortgage lenders and loan officers earn income. Each morning mortgage companies create rate sheets for loan officers. The rates usually change slightly from day to day. In volatile markets they change several times a day. On the rate sheet, there are many different programs, including the thirty year fixed rate.

There will be one column which will lists several different interest rates and another column that lists the "cost" for that particular rate. For example:

In the above example, 6.75% has a "par" price, which means it has a zero cost. The lower in rate you go, the higher the cost, or "points." A point is equal to one percent of the loan amount. The parentheses in the cost column for the higher interest rates indicates a negative number. For example, (1.500) equals -1.500, which means instead of having a cost associated with the loan, the lender is willing to pay out money for those interest rates. This is called "premium" or "rebate" pricing.

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Last modified: November 16, 1998