No-Cost Mortgage

  

Categories: 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.

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Finance: What are the components of a mo...1 Views

00:00

Finance Allah shmoop What are the components of a mortgage

00:06

payment All right so here's a weird thing about mortgages

00:10

When you borrow say four hundred grand buy a home

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and say in a six percent fixed thirty year interest

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you'll end up paying way more than the four hundred

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grand just in interest Renting the money Think about it

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Well you'll have a monthly pay payment of twenty four

00:25

hundred bucks and by the time you've made thirty times

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twelve per year or three hundred sixty payments you'll have

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paid some four hundred sixty three thousand dollars in interest

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charges Seems like a lot of money to pay out

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of your own pocket But since mortgage interest is usually

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entirely tax deductible well the rial cost to most home

00:43

borrowers is actually meaningful E less than that six percent

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interest maybe something closer to a three and a half

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four percent something like that So while yes on a

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total gross basis you will have paid out more than

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the amount borrowed over the thirty year course in the

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mortgage you'll also have been forgiven loads of taxes And

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for what it's worth over most thirty year time periods

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in history the market has gone up about eight to

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ten percent a year on average Compound did something like

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that So you feel the people mover floor moving fast

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underfoot with inflation pushing things around as you go along

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Well the money you borrow is the principal of the

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loan and that number usually declines by a small amount

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each month As you make a flat payment and it's

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usually gradually paid off Check out what the principal of

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four hundred grand looks like for the first twelve months

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of payments right here Note that the flat monthly payment

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is twenty four hundred dollars and see how the principal

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payed as part of this payment loan thing there goes

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from paydown of three hundred ninety eight dollars Teo Well

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four hundred twenty a year later right Like you're paying

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off principal little by little So you have less that's

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attributed to interest And Mohr that's attributed to principal pay

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down as you go along and note that this assumes

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Ah flat monthly payment here Right You're paying the same

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amount You're one you would You're thirty two thousand three

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hundred ninety eight dollars and twenty cents on this particular

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alone So after a year the amount owed an interest

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is well just slightly last Here in this example it's

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one thousand nine hundred seventy seven bucks down from in

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a two grand and note what it looks like at

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the end of each of the first five years That's

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a big shift from almost entirely interest do now Principal

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being ah meaningful part of it you got after ten

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years right here and then at the halfway point in

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fifteen years it's here So I noticed that the amount

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owed at this point is roughly half the total Why

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Because the lion share the pay down went to interest

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in the first half of the life of the mortgage

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AII those first fifteen years and well then in the

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back half way more will be attributed to a principal

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pay down than to interest Like check out what the

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very last month's payment looks like It's just twelve dollars

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of interest and two thousand three hundred eighty six dollars

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of principle All of this is principal until well then

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the balance is zero and we'll finally Then you will

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have fully paid off your mortgage and own your home

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