Are free mortgages too good to be true?


If you are looking to buy a new home, you will likely need a mortgage to finance it. And it’s worth shopping with mortgage lenders to see which one will return with the best deal. But it’s not easy interest rates you should look at this when comparing offers – also don’t forget closing costs.

Closing costs – these are the different fees you pay to get your mortgage and these fees vary from lender to lender. In 2020, closing costs averaged USD 5749 nationally, including prepaid property taxes (property taxes are often paid on a quarterly basis, so when you buy a home, you usually make a prepayment to cover your bill for the rest of the quarter in which you buy the home).

Some lenders, however, do not charge any final mortgage costs. And as a borrower, you may be inclined to opt for a loan without these fees. But is a free mortgage a smart idea? This is why this may not be the case.

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There’s always a trick

Most things in life are not free, and this includes the cost of closing a mortgage. This does not mean that lenders usually advertise free mortgages and charge you a commission at the end. You can actually refuse to pay the closing costs of the loan. But avoiding closing costs doesn’t mean you automatically get a better deal.

A free mortgage is almost guaranteed to come with a higher interest rate. You will need to calculate some numbers to see how much your loan will actually be worth.

Let’s say a lender charges you $ 5,000 to cover expenses and an interest rate of 3.2% on a $ 200,000 30-year fixed loan. This means that you will pay $ 865 per month for the principal and interest on this loan and a total of $ 111,534 in interest for the entire repayment period.

Now, let’s compare this to a free mortgage loan that does not charge a closing fee but does charge a 3.5% interest rate. In this case, your monthly principal and interest payments would be $ 899, which is not much more than the $ 865 you would have paid in our first scenario. But if you add up the interest paid for the entire life of the loan, you get $ 123,472. That’s a difference of $ 11,938. When we compare that to $ 5,000 to avoid closing costs, we see that this is not the best deal in the long run. This free option will cost you about $ 7,000 more.

This is not to say that a free mortgage is never a good idea. You can find a lender willing to waive the commission as well as come up with a competitive interest rate. But lenders have to make money one way or another, so don’t be fooled into thinking that a free mortgage is always your best bet. After all, you are paying those fees in one form or another.

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