No-cost mortgages are loans that are 'free' from lender fees and closing costs. A fee-free loan can save you a bundle. According to rate information provider Bankrate.com, average lender fees on a 30-year fixed mortgage were around $3,350 in 2005. A no-cost mortgage sounds like a great deal, and for some people that is true. But what about you?

No-Cost Mortgages? Tell Me More!

Lenders can offer no-cost mortgages because they charge higher interest rates on the loans. To assure a profit, lenders will usually tie a prepayment penalty to the loan.

According to Wharton business school professor Jack Guttentag, mtgprofessor.com, a no-cost loan makes sense if the rate you are refinancing into is lower than the rate you are currently paying and you plan on moving within two or three years. If you plan on staying in the home longer, you probably will save more by taking the lowest interest rate offered.

Sound Too Good to be True?

The Mortgage Professor also says not all of these loans are truly no-cost. Many of these loans are actually low-cost, so it is wise to really understand what you are paying in interest as well as fees.

A true no-cost mortgage is one where you pay zero fees to the lender, and all third party costs are paid by the mortgage company without charging you more on the loan.

For more information on mortgages, visit www.bankrate.com, www.mtgprofessor.com, or www.realestatejournal.com.

Eddie Daroza is a personal investor and stock market junkie. Besides contributing content to efinancedirectory, he works on the consumer watch program '7 On Your Side,' broadcast daily on San Francisco's ABC 7. Eddie is also a reporter for PBS's Update News.