A no-cost mortgage (NCM) is one on which all lender fees are waived, and (subject to the possible exceptions described below) other fees are paid by the lender. The quid pro quo is a relatively high interest rate, which makes the NCM costly for borrowers who expect to have their mortgage a long time. But if the borrower has limited cash, avoiding an upfront cash drain may be much more compelling than the higher interest cost spread over many years.
No-cost mortgages have one feature that I like a lot. Because lenders offering NCMs pay for services obtained from third-parties, such as title companies and appraisers, they have an incentive to find the service providers offering the lowest price. When borrowers pay for these services, which is most of the time, lenders generally accept high prices that make the service providers beholden to them.
The relative simplicity of a mortgage with only one price dimension is also attractive. In principle, it should make price-shopping much easier. Unfortunately, ambiguity about which costs are covered and which aren’t can nullify this benefit.