Philadelphia Weekly

REAL ESTATE

6 truths about no-cost mortgages

While buyers avoid overcharges, they also pay a higher interest rate

By Inman News Feed

Add Comment | Comments: 0 | Posted Feb. 27, 2012

Borrowers with long time horizons might do better with a different strategy

The benefit of the no-cost loan stems from the ability to avoid overcharges by shopping a simpler transaction. However, the cost of the higher interest rate on the no-cost loan mounts over time, and at some point the costs will exceed the benefit. If overcharges can be avoided, a borrower with a long time horizon will do better paying higher settlement costs in order to get a lower interest rate.

Such borrowers need an alternative strategy that will both assure competitive pricing and allow them to select the combination of upfront costs and interest rate that provides the lowest cost over their time horizon. Such a strategy can now be executed on my website, www.mtgprofessor.com.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.