Understanding the Benefits of a No-Fee Mortgage

Buying a home with the help of mortgage financing is one of the largest financial commitments that you can make in life. Through mortgage financing, you can borrow hundreds of thousands of dollars to purchase a home. To facilitate the mortgage financing transaction, you are likely to owe thousands of dollars in ongoing fees and one-time costs at the negotiating table. A no-fee mortgage, however, allows you to bypass these expenses that subtract away from your bottom line. Be advised that no-fee mortgages charge relatively high interest rates, so that the bank can make up for lost up-front revenue.

Closing Costs

According to the Federal Reserve Board, you are likely to pay 3 percent of your mortgage principal in closing costs. Mortgage closing costs help the bank to protect its own financial interests as it analyzes property value as collateral alongside your own credit profile. With most mortgages, your closing costs will go toward a home appraisal, legal fees, loan processing and title insurance.

Pre-payment Fees

Mortgage pre-payment fees discourage you from paying off a mortgage before it matures. The bank stands to lose tens of thousands of dollars worth of interest payments, if you were to pay off the mortgage before its term comes due. By law, the bank is required to disclose the presence of any mortgage pre-payment fees. Your mortgage contract, for example, may specify that you will owe six months worth of interest payments in cash, if you pay off the mortgage within its first year through cash flow or with the help of refinancing.

Private Mortgage Insurance (PMI)

Private mortgage insurance further protects your bank against losses. In case of your mortgage loan default, PMI will pay out a cash settlement to the lender. Each month, you will pay PMI premiums through your mortgage escrow account. In terms of costs, you may pay $50 in PMI premiums for every $150,000 that you have borrowed. According to the Federal Reserve Board, you will not be responsible for paying PMI, if you put down more than 20 percent cash on your home's initial purchase price.

No-Fee Mortgage

With a no-fee mortgage, you will not be responsible for paying closing costs, pre-payment fees, or ongoing private mortgage insurance fees. The no-fee mortgage, however, charges higher interest rates than standard, fee-based mortgages. Before taking out a no-fee mortgage, you must verify that your up-front savings exceed the additional long-term interest charges. To do so, you will pull up an online mortgage calculator and toggle through different home loan interest and fees projections. A no-fee mortgage is likely to be ideal, if you plan to put down less than 20 percent on your home and plan to own the property for less than 10 years.

No-Fee Mortgage, Sources:

FDIC: Looking for the Best Mortgage

Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs

Investopedia: No-Fee Mortgage

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