No Fee Mortgage Advice
Mortgage interest expenses can total up to be hundreds of thousands of dollars over the long term. In addition to interest charges, most mortgages charge regular fees that can also subtract thousands of dollars away from your bottom line each year. To save money, you may investigate the possibility of taking out a no-fee mortgage. As part of your analysis, you will weigh the cost savings on up-front fees against a likely increase in mortgage interest expenses.
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Identification
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Most mortgages have closing costs, which are either due prior to your home purchase or added onto your principal balance. Closing costs go toward the processing of your loan application, home appraisal, legal fees and title insurance. To coordinate these home buying services on your behalf, the bank typically charges you a few thousand dollars in closing costs. After the home sale closes, you are also may have to pay private mortgage insurance premiums (PMI) each month through your mortgage escrow account. PMI pays a cash settlement to the bank in case you were to default on the mortgage. You will be responsible for paying for PMI if you make an initial down payment of less than 20 percent of your home's purchase price. PMI usually costs several hundred dollars each year. With a no-fee mortgage, you will not owe any money for closing costs or PMI.
Features
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A bank often offers a no-fee mortgage as part of a package that includes other financial products. For example, you may be required to open up a bank-offered checking account, apply for a credit card or put money into a certificate of deposit at the same financial institution to qualify for its no-fee mortgage program. As a consumer, you would benefit further from a no-fee mortgage -- if you are already in the market for banking products. When taking out multiple products at one financial institution, you can more so easily transfer cash balances between accounts.
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Considerations
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A bank generally charges a relatively high interest rate on a no-fee mortgage as compensation for its loss of revenue at closing and the increased financial risks due to a lack of private mortgage insurance. For an interest rate comparison, you should apply to two other fee-based mortgages while you await loan approval on your no-fee mortgage. After you negotiate a final interest rate with the different banks, you can plug in the terms of each loan into a mortgage calculator and compute their total interest expenses. With the mortgage calculator, you can determine whether the up-front savings on the no-fee mortgage outweigh the additional interest expenses.
Strategy
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For savings, a no-fee mortgage would be recommended if you plan to put down less than 20 percent of your home's purchase price in cash, and to own the residence for less than five years. Under these conditions, you would save money on private mortgage insurance through the no-fee mortgage. Further, the additional interest charges above a competing fee-based mortgage would be relatively insignificant because you would only own the home for a short period of time.
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