An increasingly popular financial product is a no cost home equity loan and no cost refinance loans. Many homeowners seek these loans for various reasons. Debt consolidation, college tuition, and investment opportunities are common purposes for which these loans are utilized apart from various other not so common purposes.
No cost home equity loans are advanced against the equity in one’s home. For instance, a particular home may be worth 100,000. If the current mortgage has an outstanding balance of 70,000, then there is 30,000 equity. This 30,000 equity represents the homeowner’s interest in the property beyond any outstanding debt.
Traditional home equity loans carry myriad fees. Common examples include appraisals, title searches, and document preparation fees. These loan-related expenditures are commonly known as “closing costs”. If a homeowner borrowed 20,000 and had closing costs of 1,500, only 18,500 would be disbursed upon loan closing. The total debt obligation would be the full 20,000 however.
Refinance loans operate in the same manner, except any existing debt is included in the loan amount. In the above example, the outstanding mortgage balance would be added to any additional amount borrowed. If 20,000 is desired, a new loan for 90,000 is made. After payoff of the existing mortgage, the homeowner receives the remaining 20,000 loan proceeds.
No cost refinance loans and a no cost home equity loan are misnomers, however. In “no cost” loans, lenders absorb the initial costs so that the borrower receives the full loan proceeds. The interest rates for “no cost” loans are substantially higher than those of conventional loans, however. The higher interest gives the lender a greater long-term yield, thereby compensating for higher initial costs. Prospective borrowers should carefully compare the terms of any proposed “no cost” loan with those of traditional loans. Over time, the much higher interest rates of “no cost” loans can cost more than you think.