No closing cost mortgage. Should I get one?

Minneapolis, MN: We all know closing costs can be pretty expensive when getting a home mortgage loan.  You may have also seen advertisements for no closing costs, and no lender fee loans, and wondered how it all works. Read more, as I shed the bright light on how lending really works.

Real or a Scam?

Well, low cost, no cost, and no lender fee loans are real, and they are not officially a scam, but they are a very misleading slight of hand type of creative advertising.

You see, all lenders have basically the same closing costs.  Most costs are what is known as third part fees. This means these closing costs associated with the loan are charged by someone other than the lender who is involved in the loan process.

Common items include:

Appraisal, credit reports, title company fees, title insurance, state and country deed taxes and recording fees, and initial escrow set-up costs for future taxes and insurance.

This also includes true discount points, which is additional up-front money needed today to lower the interest rate below today's real rate.

These items need to be paid, and it is always by YOU.

Next are lender related costs. Common items include origination fees, underwriting, and processing fees.

No lender works for free either. So if they are not charging you they costs, how do they stay in business?

How the Slight of Hand Works

It is actually pretty simple. 

They simply INCREASE the interest rate on the loan in an amount significant enough to offset the reduction in up-front closing costs so you pay the costs over time with a higher rate versus paying them today.

All lenders can do this. It is nothing special.

Almost all mortgage loans these days are traditional Fannie Mae / Freddie Mac backed, or traditional government backed loans like FHA loans and VA loans. This basically means all lenders set rates based on the exact same mortgage-backed security bond market everyday, then add a little profit margin. This is why when shopping mortgage rates, you see lenders are all very close in rate.

Quick Math

So if all lenders are underwriting to the exact same program guidelines, price loans off the same mortgage backed security bond market, have to cover all the same third-party closing costs, and no one works for free. How can these guys claim a new better way, no lender fees, or no closing costs?  They can't WITHOUT something giving, and that is your interest rate.

Lenders heavily advertising no fee mortgages know that most people do not realize the rate is higher, and simply fall for the premise of lower closing costs.

Are No Lender Fee, or No Closing Costs Loans Bad?

The correct answer is yes, no, and maybe.

It is all about the math, and a few other variables. The math and variables are very different for each client, and only a detailed question and answer session about your personal situation with a licensed Mortgage Loan Officer will get you the correct answer.

Interest Rate Versus Closing Costs

Things To Consider When Picking Interest Rate and Closing Cost Options

Rate and Cost Options:

• Did you know that you can select any interest rate you want. But what are the costs associated with that rate choice?
• Did you know you can pick low cost, no cost, or even high closing costs. But what interest rate do you get for your closing cost decision?

How long do you intend to have the loan? 

• Very short stays generally mean a low or no closing cost mortgage will save you money, even with a higher interest rate. This is because you may be out of the loan before the time it takes fo the higher monthly payment to exceed what you saved today in closing costs.
• Longer stays mean over time, you will pay significantly more over time with the higher interest rate than you ever saved up-front today.

Do You Have The Money Today?

This is primarily for when purchasing a home. Down payments and closing costs can really add up. Everyone pretty much understands down payment, but first time home buyers are especially shocked to learn how much more may be needed for closing costs.

You ALWAYS need your down payment, but closing costs can with most programs be paid for by increasing the interest rate. No one likes the higher interest rate, but if you only have enough for down payment, this is a great alternative way to cover your closing costs.

The Bottom Line

So should you get a no fee mortgage?  Maybe. But ONLY after a conversation with a professional Licensed Loan Officer who has properly reviewed and discussed your situation and options.

Sadly, that is never going to be the high pressure, we have a new way of doing loans shuckster making outrageous claims all over the internet.