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November 14, 2012

What Are the Real Costs of No Closing Cost Home Loans?

Category: Published Articles – admin – 1:49 pm

In a recent article posted on Yahoo by Zillow, the question of evaluating the actual costs on the “no cost mortgage” was introduced. Are there hidden costs with no cost loans that are properly disclosed by a licensed lender under the Federal Truth in Lending Act? The answer is no. Of course it cost a mortgage lender to operate an office with a professional staff of loan originators and processors but the fees are not charged in this case by the lender. The borrower receives a no cost mortgage refinance because the lender is paying the closing cost from his compensation that bank pays the lender.

Where are the hidden costs when comparing mortgages with no closing costs?

I would answer that question with another question. Who cares? If McDonald’s gives away “free burgers” in front of the restaurant in a promotion to increase their local business, would you question the hidden cost on the free burger? No, of course not. Most consumers would assume that McDonald’s has enough money to extend some burgers in an effort to increase their popularity within their growing competition.

In Zillow’s editorial they are quoted saying, “There’s no such thing as a free lunch.” They continued to make their case that a “no cost mortgage” has an expense to borrowers. “Such words have never been more relevant to consumers being pitched no-cost mortgages, which offer borrowers the ability to pay no closing fees.”

No-cost mortgages do in fact offer people another choice in world of mortgage financing. On the other hand, the lender fees associated with processing these mortgages still need to be paid, and the cost comes in the form of a higher interest rate, costing the borrower more over the life of the loan. This is actually a good point that Zillow makes. If you do keep the loan for the entire 15 or 30-year term than you would be wise to pay the $2,500 in lender fees and closing costs on a mortgage with a lower rate. However in this kind of market, how many people are keeping their loan for the duration of the agreed terms. According to Mortgage Business Daily, the average borrower is refinancing nearly two times over a 24 month period.

Zillow Break Down on No Closing Cost Loans: The 30-year fixed mortgage at 3.5% contains total interest paid over the life of the loan in the amount of $184,968, so the total cost of the mortgage (computed by adding the closing costs to the interest paid over the full term) is $187,568. With the 30-year fixed rate no-fee loan at 4%, the total interest over the full term of the loan comes to $215,609. The total cost difference is $28,041, or about $85 per month. So if the closing costs are $2,500, you would actually break even in nearly 30 months by paying the closing costs yourself and forgoing the no-cost option. Read the original Zillow article from Yahoo.

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