Mortgage servicers have an interesting deal for new home loans: A “no-cost” option on closing fees in exchange for higher interest rates. Since rates are low enough as it is right now, should homebuyers bite? Maybe – and maybe not.

No-cost loans, also known as “zero cost” loans, allow mortgage customers to pay no fees or closing costs at the loan closing. Usually, the fees are bundled into the new mortgage, so you’re still paying the fee, and you’re still paying interest on those fees.

Let’s say you refinance your home loan into a 15-year fixed-rate mortgage. If you opt to pay the closing cost, you’ll wind up at the current 15-year fixed rate (as measured by the BankingMyWay Mortgage Rate tracker) of 3.850%. But if you opt for the no-cost option, you won’t have to pay closing fees, but you’ll get a higher rate on your loan – somewhere around 4.350%.

Keep in mind that no-cost loans usually result in about around five hundred basis points more on your loan. It’s a big decision, considering that average closing costs can clock in at around $3,000.

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Essentially, if you pay the closing costs, you’ll get a lower rate. If you get the no-cost loan, you’ll pay a higher rate.

How you’ll make out financially on the deal usually depends on how long you’ll stay in your home, known as the “break even” point. By and large, if you stay in the home for a long time, say 10 years, the lender comes out ahead because the higher interest favors the lender over time.

But if you sell the house in five years, for example, you’ll probably save some money since you won’t be paying interest over a long period of time – and you already have the lender paying your closing costs.

Let’s do the math and see how it shakes out:

With a no-cost loan

Loan amount: $300,000

Loan duration: 30 years

Interest rate: 5%

Monthly payments: $1,610

Without the no-cost loan

Loan amount: $300,000

Loan duration: 30 years

Interest rate: 4.5%

Monthly payment: $1,520

So you’re saving $90 a month by paying the closing costs yourself, allowing you to recover those closing costs within six years or so. After that, the $90 a month adds up to significant savings over the life of the loan.

In these tough economic times, it’s tempting to take the cheaper-up-front offer of a no-cost loan. But down the line, it may be a better idea to pay the closing costs and take that lower interest rate instead.

Talk to your mortgage lender and have him break down the numbers. It’s an exercise that’s well worth it, and one that may save you thousands of dollars over the course of your home loan.

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