By Scott Sheldon
NEW YORK (Credit.com) A program made popular in the height of the subprime lending environment was the no-cost mortgage. No-cost mortgages have gotten quite a bit of exposure lately, as consumers seek to better understand loan terms, interest rates and how to qualify for mortgages in an ever-tightening credit market. And then there's the low-cost mortgage. No-cost mortgages, low-cost mortgages -- two distinct differences. Here's how they differ.
Some Lending Lingo
Annual Percentage Rate (APR) is a function of blending the closing costs with the loan amount and re-amortizing that figure over the term of the loan. On traditional loan financing, the APR is usually within .125% of the actual note rate tied to the amount borrowed.
What to know: APR is a comparative tool enforced by the Truth In Lending Act to quickly assess cost differences between loan choices. The APR has no bearing on your principal and interest payment amount nor the note rate. APR is a barometer of loan cost solely. The interest rate, rather than note rate, determines the monthly mortgage payment.
What to Know: No-cost mortgages will contain a higher interest rate and APR, so you're in essence amortizing the closing costs over the life of the loan (i.e. 360 months representing a 30-year fixed rate mortgage). The higher interest rate allows the lender to generate "overage" for the benefit of the consumer taking out the no-cost mortgage.