What is a "no cost" loan?

A no cost loan is created by using lender rebates to offset all non-recurring closing costs. To obtain the rebates, the borrower must take a higher interest rate and the lender hopes to recapture the waived fees in the form of additional interest earned over the life of the loan.  more

To get a no cost loan, the lender will select a higher interest rate to offset the charges associated with the closing costs of the loan. Many lenders advertise that they will pay for your closing costs. However, you will ultimately pay in the form of a higher interest rate. The smart choice is understand the charges involved and decide what will work best to your benefit. For example, if you are short of cash, or do not want to keep your loan for a long time, sometimes it makes sense to incorporate the closing costs in the loan. However, if you are planning to keep your loan for a while, and you have enough cash, paying them upfront will be a better choice.  more

Using lender rebates to offset all normal loan-closing costs creates a no cost loan. To obtain the rebates, the borrower must take a higher interest rate and the lender hopes to recapture the waived fees in the form of additional interest earned over the life of the loan.