Behind the No Closing Cost Mortgage
Have you ever seen an ad for a mortgage with no closing costs? This type of ad is more prevalent than it used to be, and it is because traditional mortgage business has slowed in recent years.
What do companies do when new business gets scarce? They will often drop prices to attract more customers. A no closing cost mortgage sounds like the mortgage company is offering to charge you no fees to write a new mortgage, but, of course, it isn’t.
What it is really doing is raising the interest rate that it charges you on your new mortgage to pay for that “no cost” loan. The mortgage company then uses the additional interest it earns from the higher monthly payments that you are making on your new mortgage to pay for the costs it incurs to write that loan.
The mortgage lender tells you there are no costs to your new mortgage, and some of you actually believe it.
In Minnesota the fees charged by the government agencies on a new $300,000 are about $787, and there is legislation currently being considered by the state legislature to raise those fees considerably–to over $1,000. On a no cost mortgage, is the government willing to let you get by without paying that $787 fee that it normally receives?
No, of course not. That $787 still gets paid on a no cost mortgage.
The appraiser will often charge a fee of $325-350 or more to perform an appraisal on a traditional mortgage transaction. Is the appraiser willing to accept no fee for doing his work? Of course not; he still gets paid.
All of the other fees that are normally charged in a traditional mortgage transaction are still charged and paid on a “no cost” mortgage. The credit reporting agency still gets its fee for providing your credit report. The title insurance company still receives its fees for providing a title policy and closing the loan.
No one is willing to work for free. You are the one who is paying for that “no cost” mortgage, and you are paying for it by paying an above market interest rate on your new mortgage.
Next time we will explore how that higher rate mortgage pays for those fees you seem to think you are not paying on your “no cost” mortgage.
Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
