A proliferation of “No Fee” mortgage programs are being advertised lately, and who can refuse something for free? As your mother told you when you were growing up, though, nothing–or almost nothing–is free, and beware of things that appear to be too good to be true.

The “No Fee” mortgage has been around for years and has recently been repackaged and remarketed. Although a “No Fee” mortgage is not really free, it may be an appropriate product for some borrowers; however, others may want to opt for a “Full-Fee” mortgage.

The way it works with a “No Fee” mortgage is that the lender increases your rate to cover the cost of the lender fees that you would normally pay at the time of application and/or at closing, such as an application fee, appraisal fee, credit check fee, documentation preparation fee, lender title insurance, etc. Rates can be as much as half a percent higher than a standard mortgage. Also, not all fees are covered, such as per diem interest, tax escrows, attorney fees, hazard insurance escrows, etc., so you will still incur closing costs. Be prepared to pay additional costs at the closing.

Lenders can also increase the rate even more, to include the cost of mortgage insurance (MI), which is insurance required when you borrow more than 80% of the value of the home. “No Fee” mortgage rates without MI can be as much as 5/8% higher than a standard thirty-year fixed-rate “Full Fee” mortgage. As an example, a thirty-year fixed rate for a “Full Fee” mortgage at the time this article was written was 6.750%. A “No Fee/No Mortgage Insurance” rate may be as high as 7.375%. Let’s compare mortgage payments on a $250,000 loan with a 10% down payment that requires MI:

As you can see from the above example, there is no real difference in your monthly payment initially. The real benefit to the “No Fee” mortgage lies in the lender closing cost savings, which amount to approx. $1,800.00. Lenders offering “No Fee” mortgages usually include only those fees normally paid to the lender, which does not represent all of the closing costs you will pay.

To see the whole picture, though, you need to look beyond this initial cost savings. The cost of MI can be dropped after a period of time, either because of property appreciation or once the principal balance of the loan is paid down below 80% loan to value, so your savings at the lower “Full Fee” mortgage rate can really add up.

Once MI is dropped, you can see the example below:

As you can see from the above example, once the MI payment is dropped, the annual savings at the lower interest rate is huge. While you saved $1,800.00 at the closing, the breakeven period is 17.11 months to recover that amount at the lower rate of interest. The choice between the “Full Fee” mortgage and the “No Fee” mortgage is very much dependent on how long you intend to be in the home. Although the “No Fee” Mortgage had an initial savings, over the longer term, the “Full Fee” mortgage is a much better bet.

Most lenders offer both programs, and their mortgage experts can show you the pros and cons for your particular situation, loan amount, down payment, etc.

What appears to be free may not be free, so make sure to compare all of your options and do the math.