Would it surprise you to learn that ‘no cost’ mortgage loans often cost homeowners more money than home loans with standard closing costs?
Whoa! Stop the presses. What do you mean? No cost means no cost… right? Well, not exactly.
The truth is that no cost loans exist only in the world of marketing and advertising. In the real world there is no such thing a ‘no cost’ loan at all. Let me explain.
As most people know the mortgage industry has long been portrayed as an abstruse and deceptive business. No wonder with the onslaught of bold advertisements claiming impossibly low interest rates, free appraisals, and other fancy hooks and enticements.
And then there’s the granddaddy of them all - no closing cost loans.
Now think back for a minute. When was the last time you received a ‘no cost’ visit to your home from an electrician, plumber, or carpenter? How about no cost dry cleaning? Or how about the last time you had your automobile repaired with no labor costs? Exactly… never.
So why on earth would a small army of service-related employees and companies that are involved in mortgage transactions agree to work for free? Are we to believe that mortgage brokers, appraisers, closing agents, title representatives, underwriters, and loan processors all perform these duties without cost? Heavens no. They don’t and they never will.
So who is paying for all these fees? Your new mortgage company? Fat chance.
You are.
But wait! My mortgage company told me they are paying all of those fees right? Not exactly.
So how do they pull this off? Simple. They give you a higher interest rate on your loan than the interest rate you actually qualify for. In fact, it is tiered so the higher the interest rate they can ‘stick you for’ than your true qualifiable rate the more commissions they earn. This commission in the industry is called a yield spread premium. This premium can be quite large. Large enough to pay all of your closing costs and still compensate them handsomely for their work
Of course a mortgage company offering such a product probably won’t explain this premium to you or offer you a choice to select a standard cost loan. The implied offer is that they pay the costs
But in the end make no mistake about it – YOU PAY.
Let’s look at an example:
Say you borrow $250,000 and the loan has $4,000 in standard closing costs included in the new loan amount. Because of your good credit you qualify for a 30 year fixed interest rate of 6.125%. Your monthly principal and interest payments are $1,519.03.
With a ‘no cost’ mortgage your new loan amount is $246,000 (subtracting the $4,000 costs rolled in) at an interest rate of 6.875%. Your monthly principal and interest payments are $1,616.04.
In this example your payments on the ‘no cost’ loan are costing you an extra $97.01 every month. But since you saved $4,000 up front this is still OK until you get to about the three and a half year mark. That’s the break-even point for the standard cost loan and the point where the no cost loan starts costing you some serious money. In fact every single month you’re paying almost a hundred bucks more for that ‘free’ loan.
If you happen to remain in that loan for 15 years you’ll end up spending over $20,200 more for your ‘free’ loan than you did for a standard closing cost loan. And you’re only halfway thru the term. Not such a no brainer after all is it?
In my opinion it’s time for the mortgage industry to grow up and stop this form of deceitful childish marketing. To earn the trust of skittish homeowners simply by telling them the truth. Believe me, they can handle it. Today’s borrowers are smarter. They’ve heard enough horror stories by now to force them to obtain more information and avoid making bad decisions. Information such as this.
In today’s rapidly changing and bubbly real estate market with near-record foreclosures and rising interest rates it will be the smart homeowner who will win. My suggestion is to learn all you can and locate a loan professional who will shoot straight with you right out of the gate.
Bill Burniece is a consumer advocate and mortgage planner. You'll find more informative free reports from him at: Get To Own
Bill recently launched a FREE Resource Website for homeowners that want to stop their foreclosure and avoid being ripped off - located here:
http://ezinearticles.com/?The-Real-Truth-About-No-Closing-Cost-Loans&id=612912
