Why Choose a No-cost Loan?

Lenders realize that borrowers may not necessarily want to pay or have the money upfront to close loans, so they came up with the no-cost option.  With the no-cost option, lenders include the cost of closing loans by slightly raising their interest rates. 


When clients come to me for refinancing, I ask them 1 fundamental question:  How long do they plan to live in the house?  Depending on their answer, I present 2 main loan options.

1. Pay nothing to close the loan, but the rate will be higher;
2. Pay some closing costs upfront to close the loan, but the rate will be lower.

For example, my clients would like to refinance a $415,000 loan.

• A 5/1 ARM no-cost loan may have a rate of 4.375%, with a monthly payment of $2072.03.
• A 5/1 ARM loan, with $3000 closing cost, may have a lower rate of 4.0%, with a monthly payment of $1981.27.
  • The savings is $90.76 a month by going with 4.0% loan.  However, because of the closing cost of $3000, it’ll take the clients almost 3 years to recoup this amount before they could enjoy the savings.
  • This may be a good option for clients who plan to stay in the house for longer periods of time.  However, interest rates may fall in the near future and the clients would likely refinance again.

In most cases, it is more advantageous to refinance by using the no-cost option.  Yes, you’ll be paying slightly more per month, but you also have the flexibility to refinance to a lower rate at anytime, without worrying about having to pay or whether you’ve recouped your previous closing costs...


I always present both no-cost and some-cost loans to my clients.  I tell them the pro’s and con’s of both cases and let them decide.  If asked, I tell which loan I’d choose, but the decision is ultimately theirs.