They advertise relentlessly on the Internet, radio and elsewhere.

"Refinance your mortgage today! Save thousands of $$ No hidden costs, just great rates! Zero: That's your cost for refinancing!"

In recent months, a growing number of mortgage lenders and brokers have been hawking "no-cost" mortgages, in which the lender picks up the expenses that normally would be paid by the borrower.

And they're popular. Many borrowers see the mortgages as a convenient way to take advantage of falling interest rates while keeping more cash in their bank accounts. The pitch sounds great. Borrowers who get approved for these mortgages can avoid paying an assortment of fees, including legal, appraisal and origination, associated with a mortgage. For a $100,000 mortgage, such costs can range from $3,000 to $5,000.

But that's not the whole picture: Lenders who offer no-cost mortgages often make up for the lost fee income by charging higher interest rates.

For instance, Countrywide, one of the largest mortgage lenders in the country, adds three-quarters of a percentage point to its no-cost mortgages. Instead of paying 7 percent on a 30-year, fixed-rate mortgage, a borrower would pay 7.75 percent. That adds up to $18,400 in higher interest payments over the life of a 30-year $100,000 mortgage.

"You can do the math," said Chuck Small, a financial adviser with ACH Investment Group, an investment advisory firm in Raleigh, N.C. "You'll be paying thousands of dollars more over the life of a mortgage."

Still, no-cost mortgages make sense for borrowers who don't plan to stay in their homes for longer than four years, said Gordon Miller, president and founder of DNJ Mortgage, a firm that specializes in no-cost mortgages.

For instance, a borrower who gets a $100,000 mortgage at a 7 percent annual interest rate will save $51.11 a month in interest payments compared with someone who gets the same mortgage (without fees) at 7.75 percent. That, in monthly savings, is attractive; but it would take 39 months, more than three years, to recoup $2,000 in fees associated with the conventional mortgage.

"For some people, especially those that are worried about losing their jobs, three years is an eternity," said Miller, who began doing no-cost loans 14 years ago. "They would rather keep more cash in their bank account and pay slightly higher (interest payments)."

For people who already own a house, the no-cost option eliminates the fees associated with refinancing, in which one mortgage is replaced by another with a lower interest rate.

Since July of 2000, mortgage rates have fallen more than a full percentage point, from 8.26 percent to 6.96 percent, on a 30-year, fixed-rate mortgage, according to Bankrate.com of North Palm Beach, Fla., which surveys the nation's largest lenders each week. Many homeowners want to take advantage of those falling rates without paying thousands of dollars in fees each time they refinance.

"Theoretically, with a no-cost mortgage, you could refinance every time rates fall no matter how small the reduction (in interest rates)," said Randolph Straughan, a loan officer with First Financial, a Charlotte, N.C., mortgage broker.

The growing popularity of no-cost mortgages is a major reason that Americans are on pace to refinance $1.07 trillion in mortgages this year -- a record, according to the Mortgage Bankers Association in Washington.

But borrowers should watch out for scams. Often, the companies who promise to waive fees for mortgages are really just rolling those fees into the cost of the mortgage, ACH Investment Group's Small said. The borrower may not realize this until closing, when he or she discovers that a 100,000 mortgage has increased to 103,000.

A borrower who doesn't read the fine print can end up paying interest on those extra dollars over the full life of the mortgage.

"Just remember," said Small, "that mortgage lenders aren't in this business for charity."

Article by financialone