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Focusing solely on your mortgage rate distracts you from the real cost of the loan — and it can be an expensive mistake.
That’s because the lowest interest rate doesn’t always translate to the best loan offer.
All borrowers must pay closing costs typically ranging from 3% to 6% of the loan. These fees can make or break the deal you think you’re getting on the interest rate.
The best deal hinges on how long you keep your loan. A low mortgage rate seems attractive when you calculate the savings over 30 years. But the reality is, the number of borrowers who keep a loan for 30 years is “virtually zero,” says Laurie Goodman, a former vice president for housing finance policy at the Urban Institute, a nonprofit think tank.
An option often overlooked by borrowers is a no-cost loan. It means accepting a higher interest rate in exchange for no closing costs, and it can often leave you with more cash in your pocket. By saving on upfront closing fees, cash is freed up to put toward other financial goals, such as investing for financial independence or paying off debts.
Mortgage rates have been rising to prepandemic levels and housing prices continue to reach record-highs This makes no-cost loans especially appealing right now because they can help reduce upfront costs — keeping more cash in your pocket or more cash to use towards a higher down payment.
Here’s what you need to know about no-cost loans.
How A Higher Mortgage Rate Can Save You Money
When presented with a no-cost loan or a low rate with closing costs option, it can be difficult to tell which one is best for you. On the surface, an interest rate appears to be the only money-saving factor of home financing.
Here is how the two loan types compare on a 30-year, $300,000 loan:
| Out-of-Pocket Closing Fees | Interest Rate | Monthly Payment | Total Interest & Fees | |
|---|---|---|---|---|
| Loan A (Low Rate + Closing Costs) | $9,000 | 3.9% | $1,415 | $218,400 |
| Loan B (No-cost loan) | $0 | 4.3% | $1,482 | $234,459 |
*Data courtesy of NextAdvisor’s Loan Comparison Calculator. Try it here.
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