Ok, what's the catch with no closing cost mortgages?

One loan company has been advertising heavily over my local airwaves lately offering what they claim to be no closing costs mortgages.. They offer no closing costs mortgage loans and say you'll pay thousands in interest over the life of the loan why should they suck it to you in closing costs as well. Not only that but they will keep a watch on the interest rate and refinance for you if it goes down. Sounds good but I image there is a catch, what is it?

It typically has a higher interest rate. I would expect a quarter to as much as half a point more. So what you save up front, you pay over the life of the loan. If you are in this loan for the long haul, it's probably better to pay for points to get the rate down. It really depends on each individual's situation.

Somebody has to make money somewhere for the "risks" they are taking. Things to look for:

• Higher interest rates than you can otherwise qualify for
• Prepayment penalty
• Balloon payment (all due) or refinance in 5 years even though "30 year" loan schedule
• Bait and Switch (everything is OK, but drag out, then bang--something changes)
• Promise you great service, then sell your loan to somebody else--leaving you to figure out who to pay and lost payments, etc.
• Some other weird terms (if loan for home, you have to live there forever or rates raise or loan terminates)

Those are some of the issues I can think of... Any and all of the above are legal and, probably, the price of no up front costs and/or lower than normal loan rates.

-Bill

Here's the deal from a California Mortgage Broker.

The catch is that unethical loan officers will try to put the closing costs into the loan balance on a refinace without telling you.

or you pay a higher rate.

There are Non Recurring Clossing Costs NRCC's (Ones that only halppen to make the loan such as appraisal, title insurance or even points) and Recurring Closing Costs "Pre-Paids"(Ones that you continue to pay such as pre-paid interest, insurance and taxes or HOA) Non of these fees are good or bad.

These are the costs they speak of.

If your loan is $300,000 and you have $3000 in NRCC's and $3000 in pre-paid fees they will make the loan $306,000 so you don't have to come up with any of the money. Nothing wrong with this if you know about it and understand it.

The higher rate part was already explained. You can practically take any reasonable amount of costs and absorb them into a higher rate. So instead of having a $300,000 30-yr fixed loan at 6.25% + Fees you get it at 6.75% no fees so your payment may be higher depending on the rate to fee ratio.


There's a lot to it and I could type for hours. The question is, what do you think will cost you more, the wrong rate or the wrong loan?

These also might only be available to high 800 to 900 FICO scores.

Has nothing to do with High FICO scores. Just structuring.

tdurand said:

These also might only be available to high 800 to 900 FICA scores.

Click to expand...

I was under the impression that the FICO and FICA scale was 300-850.

How would one go about getting a high 800-900 score?

Sorry for my typo up there. I was looking at my paycheck
As far as I know Equifax has a range of 300-850 but I think the other two use ranges that go higher so it depends on the reporting entity.

As far as not mattering, I could be wrong, I just thought it would be a good "filter" for a mortage underwriter to skim off the cream.

It's like trading in a car.

They can give you a great price on the new car and a lousy trade. Or, they can give you a "great" trade and you pay about sticker price on the new car.

The bottom line is that the Mortgage Broker is going to make the same money, either through a bigger commission on a higher interest rate (the broker gets paid when you close...the mortgage holder gets paid over time), or through you paying the "closing cost".

Regardless, the Mortgage Broker gets the same money.

BTW: Virtually EVERY line item on the statement is negotiable. Do not agree to bull$hit things like FedEx charges...always negotiate "origination fees" and in this market DO NOT pay for a credit report. The best argument (it works) for a credit report is "I don't have to pay for that to buy a car, and I'm not going to pay for it to buy a house."

Be willing to go elsewhere if you want to negotiate the best fee.

When it comes to anything where money exchanges hands--especially with the financially shrewd--let us all remember P.T. Barnum's famous words. ;-)

(I don't want to mention any names, but their initials rhyme with BANKS.)

magic79 said:

It's like trading in a car.

They can give you a great price on the new car and a lousy trade. Or, they can give you a "great" trade and you pay about sticker price on the new car.

The bottom line is that the Mortgage Broker is going to make the same money, either through a bigger commission on a higher interest rate (the broker gets paid when you close...the mortgage holder gets paid over time), or through you paying the "closing cost".

Regardless, the Mortgage Broker gets the same money.

BTW: Virtually EVERY line item on the statement is negotiable. Do not agree to bull$hit things like FedEx charges...always negotiate "origination fees" and in this market DO NOT pay for a credit report. The best argument (it works) for a credit report is "I don't have to pay for that to buy a car, and I'm not going to pay for it to buy a house."

Be willing to go elsewhere if you want to negotiate the best fee.

Click to expand...

You just contradicted yourself. "regardless the Mortgage Broker gets the same money" and EVERY line item being negotiable.

Your first statement is closer to being correct with a good reputable broker and your second statment you'll find more often with less reputable loan officers. Generally speaking.

I'm not in the business, but.....

When re re-fi'ed a few years back the finance company gave us a rate quote. The only fees paid were the notary public fees when we signed the papers at a local mailing center.

The rate was the same as we found elsewhere with points and fees, so we figured it was a good deal. WHile there was a possibility that we qualified for a lower interest rate, we did not find one. BTW, the loan was a 7 year loan on a 7 year schedule, no balloon or early pay off fees.

If you think about it, the banks should do pretty good without fees. At the time they were paying 1.75% on CDs and loaning money at 5.5%. That's a 200% markup and their cost is a few hours of paperwork plus the risk of deadbeats. Darn good return, if you ask me.

That's assuming a lot daniel

I estimate 99% of banks don't keep their loans. So those figures don't work at all, in the slightest. This eleminates the deadbeat statement. Just think if it really had to work like that and any bank could just loan money this way. Their guidlines would all be different and very strict. Like before the days of Fannie Mae.

Here's a quick rundown of how it works.

The are two separate profit centers after origination.
The Loan and Servicing

Loans are originated in the primary market and sold in the secondary market. Smaller loans are sold to Fannie Freddie etc because they "conform" to their guidlines. (Conforming Loans)

Servicing is kept or sold as well. The servicing is what you see on your bill or in your credit report. And when they send you a letter that they sold your "loan" they really sold your servicing. (The collecting of the money each month)

The profits are based off of indices such as the 10-year bond yeild for 30-year notes or some other index such as the LIBOR (London Inter Bank Offered Rate) etc. for other types of loans. The spreads along with the indicis change all day every day, making one loan more attractive than another.

I was giving 3.75% jumbo ARMs a while back and now they are above 5%. Margins on those ARM's were sometimes below 2%!! Fixed products were best when the 10-year bond was below 4.0%

Anyway, it's much more profitable for the "Lender" to sell the loan, take the hugh profit and increase their warehouse line to do it all over again, than it is to portfolio the loan themselves.

It's kinda funny that we might buy a CD to make 3% or a bond to make 5% as individual savings investors but we (the collective of consumers) pay 6% on a loan of our own money. (from the collective) Because the investors in the secondary market are buying and selling the money back to us as a different investment. It's all very complex and I'm not an expert at the investing part by any stretch of the imagination. More like a student