No Closing Cost Mortgage

No Close Cost Mortgage advertising in a word is a rip-off. So much so that California regulators outlawed the use of the phase in all mortgage advertising in their state. All state mortgage regulators should immediately adopted the same restriction if they truely want to protect mortgage consumers. Until then, the rest of the country is fair game. That means you! Read this carefully and learn to protect yourself. Not doing so can cost you $20,000, $50,000 or even $100,000 over your mortgage paying lifetime.

Let’s get started…understanding No Close Cost Mortgage.

Living in Denver where this advertising is still legal, everytime I turn on the TV or the radio, I see or hear a mortgage ad touting a $395 Flat Fee loan or a No Close Cost Mortgage. Of course we’ve all seen the Ditech cable TV commercials non-stop over the last 5 years stuffing the $395 Flat Fee loan down our throats. This is a prime example of a deceptive ad. But the one that really chaps my hide, is the Lenox Financial radio spots for No Close Cost Mortgage that says, “Come in with a $300,000 loan, and you can leave with a $300,000 loan and a No Close Cost Mortgage. We make plenty of money. We don’t need to charge you any fees. Don’t be fooled by those predators who want to take your money. It’s the biggest no-brainer in the history of Earth.” or words to that effect.

Yea, no-brainer is right…you’d have to have no brain to believe this garbage and the so called No Close Cost Mortgage.

I visited their website and lie continues about No Close Cost Mortgage,

“The way it works is simple. Our company has created such a high volume through our investors that they are willing to pay us more for your loan than any other brokerage firm. This is typically enough money that we can pay your closing costs, and you will have a No Close Cost Mortgage and still have money left over for our company as well!”

This is the most egregious example of false, deceptive, and misleading advertising ever allowed to exist in our country. The impression conveyed by the outright false advertising, is that a “free” loan or “No Close Cost Mortgage” is possible due to “high volume”. Nothing could be further from the truth.

The truth is mortgage companies don’t “waive” or “cover” closing costs. They “offset” them with the kickback income they get from charging you a much higher rate than you qualify for. This is called Yield Spread Premium overcharging. The lender pays the mortgage company lots of money, that part of the ad is true. Of course, the reason why is where the deception comes in with a No Close Cost Mortgage.

The ONLY WAY that company will pay your fees is if they charge a higher than market interest rate, getting a rebate or kickback from the lender for doing so. If they are a correspondent lender or a bank (like Lenox Financial and Ditech), you will never see the lender kickback money they are paid. But due to the higher interest rate they charge, YOU WILL PAY for all those closing costs AGAIN AND AGAIN over the life of the loan in the form of higher monthly payments. In the super-fast-talking legal statement at the end of their ad, it states that you can receive a lower Annual Percentage Rate by paying fees. Oh, really? No Close Cost Mortgage?

You tell me, with double-talk and half truths so flagrant as to make a politician blush, who is the REAL predator here?

So Flat Fee or a No Close Cost Mortgage ads should signal you the rate you’ll get is not just inflated, but “hyper” inflated. Since even on loans where the consumer pays the costs at closing, the rate is inflated for extra profit. This typical Yield Spread Premium overcharging amounts to .5% higher for you and thousands of extra dollars for the company. With the No Close Cost Mortgage or Flat Fee companies, they plan on raising the rate not the typical .5% to insure their profit, but an additional amount to cover all the actual third party closing costs as well. This hyper rate inflation could add another .5% or more to the rate you could have reasonably expected.

Another ugly truth behind the hype about the No Close Cost Mortgage or Flat Fee transaction is the mortgage company makes as much as 5 percent of the loan amount as a rebate from the lender, and in many cases, it is not disclosed to the borrower. On a $200,000.00 mortgage, they could conceivably earn $10,000.00 while giving the impression that they are doing the loan for nothing. Sure the company covers all the third party closing costs of say $4,000 and pockets $6,000 pure profit. And of course, you are stuck making a payment on a hyper-inflated rate…probably close to a full interest point above the rate you qualified for.

As a 15 year mortgage veteran who knows how money is made in the mortgage business, those advertisements are upsetting to me. Why? Because they give the impression that they are looking out for you, the consumer, and they are working for free when they are actually working against you making huge undisclosed profits. This kind of deceptive advertising used by virtually every bank and broker in America is, in my opinion, the reason consumers don’t have any faith in mortgage industry professionals anymore. This is bad for all good mortgage professionals. We’ve seen our industry go the away of used car and aluminum siding sales. It’s time to clean up our own backyard starting with these unethical companies.

Everyone who works on your loan is going to get paid by you at closing by one of three ways: 1) either by a one-time fee listed on your settlement statement, or 2) by the lender rebate created by charging you a higher interest rate, or 3) a combination of the two. Don’t believe the hype. As in all things, if it sounds too good to be true it probably is. Beware of what you are signing. Read all the fine print (and there is a lot of it.) Ask questions of your loan originator. Ask point blank, “I know no one works for free. So tell me, how much lender rebate will you get at that rate? How much of that lender rebate will go toward my actual closings costs? How much lender rebate will you and your company get?”

Decide for yourself the most important consideration with your new mortgage. Is it keeping the payment affordable? If so, you’ll want to pay the costs as one-time fees and maybe even pay discount points to buy down the interest rate. Is it getting the costs paid by lender rebate because you are planning to move in a couple of years and you can afford the higher payment? But YOU should be in the driver’s seat and make those decisions from a position of knowledge. All mortgage brokers can provide a mortgage with either you paying the closing costs as one-time fees or the lender rebate paying the costs and you paying a higher monthly payment.

Remember this: You Always Pay the Costs for Every Mortgage…you and nobody else. The only thing to determine is how. The purpose of this article is to help you understand your options when it comes to paying those costs. Also, I hope this helps you separate the honest from the dishonest which is just as important in your search for the right mortgage company and the right home loan.

Good Luck!

No Close Cost Mortgage

There is no such thing as a No Close Cost Mortgage. It simply doesn’t exist. There are always costs to originate a mortgage and no company or bank has the ability to waive costs. So, why is company after company and bank after bank advertising No Close Cost Mortgage if they don’t exist? Because it makes the phone ring and they figure that is half the battle. Their commercials make it sound like you get a No Close Cost Mortgage and that makes the phone ring.

But do you really get aNo Close Cost Mortgage for free? No, there are only 3 ways to pay closing costs. You pay them with your own money, you roll them into your loan, or you increase your rate to pay them. That is how they can offer a no closing cost mortgage. They increase your interest rate. For brokers it is called yield spread premium and for banks it is called service release premium. Whatever it is called, it is a chunk of money created by increasing your rate.

For some people this may be new information but even for those who knew the interest rate was being bumped, they may not know to what extent. How much do you think the rate is increased to pay costs? I have had several people tell me they know the rate is increased but only about .25% or .375% to cover the costs of their No Close Cost Mortgage. The numbers don’t lie so let us see just how much it increases.

A good rule of thumb is for every .25% increase in the interest rate, it creates .5% of YSP or SRP. For example on a $200,000 mortgage, if the rate was increased from 6.0% to 6.25% it would create $1,000. The rate increased by .25% and it created .5% of the loan amount as money to the originating company. Multiply $200,000 by .5% and you get $1,000.

On a $200,000 mortgage you would have around $5,000 in closing costs and that includes a 1% origination fee. This number does not include the escrows or any interest. The companies offering No Close Cost Mortgage refinances usually do not include these charges in the estimate so you would have to pay them yourself. You can see from the example above that a .25% increase in interest rate only creates $1,000 and you have $5,000 in closing costs on a $200,000 mortgage. A .25% bump in the interest rate would not come close to covering your No Close Cost Mortgage.

You would have to increase the rate from 6.0% to 7.25% to pay for $5,000 in closing costs. And the $5,000 closing cost amount only includes a 1% origination fee. We all know they need to make more than just 1 point. So, in order for the originating company to make their 2 points or more you would have to raise the interest rate again to 7.75% to cover all the costs and pay the originating company 2%.

Many of these companies have a disclaimer that says the loan amount must be $300,000 or more. As you can see, for a $200,000 mortgage the rate increase is considerable and something that makes it harder for them to sell. The bigger your loan amount the easier it is easier to offer the No Close Cost Mortgage since the YSP or SRP is a percentage of your loan amount.

But is paying an extra $200 a month for a pretend no closing cost mortgage a smart idea? No, always pay your closing costs and get the lowest rate. The lower the interest rate you pay to the bank the better off you are. These guys are just trying to sell you something you do not need.

Good Luck!

No Close Cost Mortgage