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 is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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