What defines a no-cost loan in the context of mortgages?

A no-cost loan is characterized by the fact that the borrower's closing costs are absorbed through a higher interest rate. This arrangement allows the borrower to avoid upfront payments for expenses such as appraisal fees, title insurance, and other closing costs. Instead of paying these costs at the outset, the lender incorporates these costs into the overall loan structure, which is reflected in the interest rate.

This approach can be particularly appealing to borrowers who may not have sufficient funds readily available for closing costs or who prefer to keep their initial cash outlay to a minimum. By accepting a higher interest rate, they can facilitate the loan process without the burden of immediate expenses, although it's important for borrowers to be aware that while they save upfront, they may pay more over the life of the loan due to the increased interest charges.

The other options do not accurately define a no-cost loan. For instance, a loan with no interest charged is not viable because lenders must generate income, and a zero-interest loan is generally not common in traditional lending practices. A loan requiring no down payment relates to different lending programs, primarily aimed at first-time homebuyers or specific government-backed loans, rather than the classification of no-cost loans. Finally, a loan with guaranteed repayment terms indicates stable payment schedules but