Zero-rate Mortgage Definition

A zero-rate mortgage is a mortgage with no interest rate, or, formally, where the interest rate is zero. In these types of mortgages the interest amount is calculated for the entire term and simply added to the principal yielding a single wholly-capitalized sale price.

For example, a lender estimates that a $425,000 traditional thirty-year, fixed rate mortgage at the current market rate would have a total repayment cost of $1,022,652; instead of arranging a traditional mortgage, the foolish buyer agrees to a mortgage loan for the larger amount with a zero-rate mortgage.

These types of arrangements are illegal in most jurisdictions and-as can be obviously deduced-greatly favor the seller and the mortgage lender. Note that if the new buyer sold the house after only three years, for example, they would still owe the full interest amount for the remaining twenty-seven years of the mortgage.