Wednesday, March 22, 2023

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no free mortgage

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Have you ever heard the word “No free lunch.” Like a home loan, there’s no “mortgage-free.”

Of course banks and lenders will offer deals that make it so. They will offer you a mortgage without closing costs. or no points

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But that doesn’t mean it’s free. After all, everything has a cost.

it’s just how You pay for that change. and in the world of mortgages you have options

You can accept a higher mortgage rate and not pay out of pocket. or save each month with a cheaper interest rate instead

Zero origination fees doesn’t mean mortgage-free.

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First things first, zero origination fees doesn’t mean your mortgage is free. It means banks, lenders or mortgage broker Does not charge initiation fees

one origination fee It is an upfront fee charged to the borrower to compensate the lender.

Some mortgage companies charge Some don’t. However, those who can’t (and likely will) earn commissions in other ways.

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Remember that no one takes time out of their day to help you get a home loan without making any money.

That would be nice, but that’s not how life works. And why is no one getting paid?

If they are helping you apply for and finance your home loan. They should be compensated. It’s really hard work.

The lender pays compensation on the mortgage.

Many mortgage brokers get their money through. The lender pays compensation.This means that the lender pays on behalf of the borrower.

for recording Compensation paid by the borrower is also an option. But it is generally not an opt-in option.

Why? Because most borrowers don’t want to pay thousands of dollars to a mortgage company or broker.

So they opted for pay lenders instead. The way this works is very simple. The lender has a slightly higher rate sheet. mortgage rates That factor in this compensation.

For example, a borrower may receive a 30-year fixed interest rate of 6.5% without any fees. It’s not a free mortgage.

It’s a mortgage with a built-in fee. The higher interest rate covers the fees the borrower normally pays in advance.

and instead of paying in advance How do you pay over time? through higher interest rates

If you pay for the closing upfront and the commission is free. Your mortgage rate could be 6% or lower.

Free Mortgage Examples

Loan amount $450,000 non-free mortgage
Free Mortgage
Mortgage Rates 6% 6.5%
origination fee $4,500 $0
Closing costs $2,250 $0
all upfront costs $6,750 $0
Monthly P&I Payments $2,697.98 $2,844.31
monthly savings $146.33

Now let’s compare the two options. no mortgage cost with a 6.5% rate and a 6% rate with own expenses

The monthly payment for a loan amount of $450,000 at 6% is $2,697.98 for a 30-year fixed mortgage.

That’s $2,844.31 on the same loan at a higher 6.5% rate, that’s a difference of $146.33.

Does that mean a mortgage with no fees? Or does that mean you have to pay almost $150 more each month?

It’s similar to not having a free lunch. there is always a charge It’s just how/when it’s paid, not whether it’s already paid.

However, that doesn’t mean one deal is better or worse. You have to do the math and make a decision.

A free mortgage can be a better or worse deal.

Now for sure free is better than not free. At least when it comes to upfront costs.

Keep in mind that a free mortgage costs about $150 more per month. But we need to consider the cost of closing a non-lien-free mortgage.

If our hypothetical borrower has a 6% rate, they must pay lender fees at closing. and third party fees as well, such as escrow title insurance, Assessmentetc

Assuming they pay their lender a 1% commission and $2,250 in closing costs, that’s $6,750.

So, even though they saved about $150 a month, they “In a loophole” $6,750 compared to free mortgage borrowers

but each month They will dig themselves out of the pit. This happens through lower payments and less interest payments. Lower rate mortgages result in less interest. and pay more Principal.

in order to process or pay those advance costs; It will take about 40 months to pay off the mortgage.

After that, the holders of the 6% mortgage rate win, they pay the closing costs and save each month thereafter.

It depends on how long you keep the mortgage. And what rates will happen in the meantime?

as you can see Time is an important factor in the free vs. non-free mortgage equation. Borrowers who opt for mortgage-free must maintain their mortgage for a period of time.

If not, leave money on the table. They are never aware of the monthly savings being paid at closing.

This means that if they sell or refinance mortgageThey didn’t win, at least in terms of the closing costs they paid.

So you must have a plan when you take out your mortgage. Think about how long you’re going to keep the house. and may also be mortgaged

But keep in mind that mortgage rates are subject to change. they can do it change every day.

If you pay the closing fee from the pocket AND discount points Today, for those lower rates, it may not work.

You may find that the 30-year fixed interest rate comes back below 5% and what you’ve paid is lost if/when you refinance to a new, lower rate.

So a free mortgage will give you a small amount of insurance policy. Not a cheap monthly But you can refinance as needed if rates improve. You can also sell your house if you want.

oh and you can Paid out before the deadline. Reduce interest payments as well.

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