No-Cost Mortgage

When you refinance your mortgage, there are two basic ways the lender makes money. First, you have the interest rate: the percentage extra you have to pay back to compensate the lender for giving you the loan. Second, you have the settlement costs. These fees basically cover the bank's expenses for processing the financing paperwork.

A no-cost mortgage doesn't include any of this second type. The borrower avoids the immediate settlement costs (which typically get paid as a lump sum at closing). In exchange for waiving these fees, the lender usually charges a higher interest rate. Typically, in these cases, the borrower ends up paying more over time. (The higher interest rate leads to increased overall expenses.) However, these get folded into the monthly charges, and might seem largely negligible in relation to the overall mortgage bill. Meanwhile, the borrower doesn't have to write a big one-time check for the settlement costs.

So...a borrower might save $2,500 in one-time costs due at closing. However, the bump in interest might lead to a higher monthly mortgage bill of $10 a month. Over the course of a 30-year mortgage (encompassing 360 months), that means the borrower is paying a total of $3,600 additional on the interest expense ($10 times 36). So they pay more in the long run than the $2,500 they would have had to pay at closing. But, for many people, it's a lot easier to find $10 extra dollars per month than having to scrape together $2,500...now.