No-Fee Mortgages: Are They Worth It?

When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible. Any opportunity a borrower can exploit to shave dollars off the cost is a big win. This explains the allure of no-fee mortgages. These home loans and their promise of doing away with pesky fees always sound appealing — a lack of lender fees or closing costs is sweet music to a borrower's ears. However, they come with their own set of pros and cons.

Be Prepared for a Higher Interest Rate

But nothing is truly free, and this maxim applies to no-fee mortgages as well. They almost always carry a higher interest rate.

"Over time, paying more interest will be significantly more expensive than paying fees upfront. If no-cost is the offer, the first question that should be asked is, 'What is my rate if I pay the fees?'"

— Ralph DiBugnara, President, Home Qualified

So while you'll have saved $7,500 in the short term, over the long term you'll wind up paying more due to a higher interest rate. Weigh it out with your financial situation.

Consider the Life of the Loan

Before you start calculating the money that you think you might save with a no-fee mortgage, consider your long-term financial strategy.

"No-fee mortgage options should only be used when a short-term loan is absolutely necessary."

— Jack Choros, CPI Inflation Calculator

A no-fee mortgage may be a smart tactic if you don't plan to stay in one place for a long time or plan to refinance quickly.

"If I am looking to move in a year or two, or think rates might be lower and I might refinance again, then I want to minimize my costs. But if I think I am going to be in the loan for 10 years, then I want to pay more upfront for a lower rate."

— Matt Hackett, Operations Manager, EquityNow

What Additional Fees Should You Be Prepared to Pay?

As with any large purchase, there's no flat price. Hidden costs always lurk in the fine print.

"Most of the time, the cost for credit reports, recording fees, and flood-service fee are not included in a no-fee promise, but they are minimal. Also, the appraisal will always be paid by the consumer. They are considered a third-party vendor, and they have to be paid separately."

— Ralph DiBugnara, President, Home Qualified

"All other costs such as property taxes, home appraisal, homeowners insurance, and private mortgage insurance will all still be paid by the borrower."

— Randall Yates, CEO, The Lenders Network

It's important to ask what additional fees are required, as it varies from lender to lender, and state to state. The last thing you want is a huge surprise.

"Deposits that are required to set up your escrow account, such as flood insurance, homeowners insurance, and property taxes, are normally paid at closing. Most fees, however, will be able to be covered by rolling them into the cost of the loan or paying a higher interest rate."

— Jerry Elinger, Mortgage Production Manager, Silverton Mortgage

When Does a No-Fee Mortgage Make Sense?

For borrowers who want to save cash right now, but don't mind paying more over a long time frame, a no-fee mortgage could be the right fit.

Originally published on Realtor.com by Kristine Hansen · February 28, 2024.