What exactly is a zero cost loan? It’s just what it sounds like: a mortgage that costs you nothing out of pocket. Of course, the mortgage market is not an altruistic one. There are in fact no free lunches. The main goal of lending money is to make money. So how does a zero-cost loan work?
Refinancing is no small process. It takes time, money, and a lot of attention. Most people could strongly benefit from doing so, however. The mortgage market is not the same as it was only a couple of years ago. Refinancing used to mean high closing costs and plentiful fees. Now, however, you may be able to refinance without paying a penny. Increased competition and a larger market size put power into the consumer’s hand. Because everyone is competing for your business, the zero-cost loan is becoming more and more popular.
In place of fees a borrower will accept a slightly higher rate. Instead of a 3.875% with $2,000 in fees, a zero-cost loan will be offered at 4.00%. This slightly higher increase in interest rate will barely affect the monthly payment; if at all. So if you’re focused on saving money right away, taking that higher rate will save you big time.
Another thing to keep in mind about mortgage rates is that they change every day. When you’re paying that $2,000 in fees one day, you may be able to get that rate for zero-cost in the future. The rate that you’re paying for you could be able to get for free in the near future.
Because you never know where rates are headed, though, you’ll have to make a decision of how much you’re willing to spend and what rates you’re comfortable with before you start shopping.