No Cost Loan

A no cost loan can end up costing a borrower more in the long run than just coming up with a down payment at signing. This type of lending is designed to help people that don't have a stash of money put away to buy a house. The problem is, when one chooses this option, there will usually be a high interest rate attached to the funds.

The interest rate for this type of lending will only go up 2% or so, which may not sound like a big deal, but that's an extra $500 on the first payment! Some people say choosing a no cost loan depends on how long the homebuyer will be in the home, but doing the simple math of how much extra would be paid out for the higher interest rate, will show what the better deal actually would be. The amount of interest payment cannot be deducted on taxes, but (over the term) the closing cost amount can be. This is where the decision gets tricky.

One way for homebuyers to figure out whether this lending option is best is for them to guess about how long the house will be their home; to calculate how much a higher interest rate in that time period would cost; and to compare to the closing costs for a traditional mortgage. This way the borrower will be able to see exactly where the money will be spent and what action needs to be taken concerning no cost loans.

When choosing the right lending, borrowers need to look at more than the closing costs and the interest rate and figure in any hidden fees, such as, late payment and early payment penalties, and policies for overpayment. Some banks or loan institutes have insurance for homebuyers to protect the home from loss of income due to a loss of employment. No cost loans can be just as confusing as traditional mortgages, but if borrowers take it one step at a time it will work out. Each lending option will work a little differently. This kind of lending is going to have the same fees and penalties as regular loans so borrowers must read the fine print in the contract or ask the loan officer what the guidelines are for these issues. When working with a officer, it is wise to make sure he or she has offered all the options for no cost loans.

Homebuyers need to remember that just because they are applying for this type of lending doesn't mean they can't try to negotiate the interest rate. God wants us to use His money in the best way possible. If the homebuyer is uncomfortable with the no cost loan a bank has to offer, they should move on to the next bank. This may seem frustrating, but in the end the borrower will be happy with their choice. Just pray hard and be patient. "Rest in the LORD, and wait patiently for him" (Psalm 37:7).

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