Mortgage interest rates have began to fall in 2008. Along with improving interest rates and the hope of tapping into a homeowners' emotion, misleading mortgage advertising offering incredible promises seems to be coming back. For example, I just saw one such advertisement on TV recently, for "The Real No Cost Mortgage". As a 12 year mortgage broker veteran, I shudder each time I see or hear advertising about this type of mortgage, especially in light of the mortgage industry collapse in 2007. I'm going to say it right off the bat: There Are No "No Cost Mortgages" on the Planet!" Is this clear? All mortgages have costs associated with them. Period, end of story!
How Do No Cost Mortgages Work?Most "no cost mortgage" loan programs are designed the same way: the interest rate of your loan is increased to cover the costs associated with your mortgage. There are a select few mortgages that have very little costs associated with them: these are home equity lines of credit - or HELOCS. Often you can get these little or no cost loans at your local credit union or small community bank. Additionally, these loans typically only allow you borrow up to about 90% of your home's value. Credit Unions are small enough that they perhaps can offer to pay some of your costs as a courtesy to earn your business. The larger banks simply cannot pay or give you these costs for free or it would set them back a few dollars.
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| No Cost Mortgages - Are They Really No Cost? |
With these small second mortgages and HELOCS aside, the rest of the mortgage market is primarily made up of larger first mortgages. As I previously stated, these mortgages have costs associated with them such as: paying a processor to process your loan, the cost for an appraisal, the underwriter, the title insurance policy, your credit report, tax and insurance escrows, and of course the money that your loan officer makes in commission. All of these fees in one form or another get paid, and guess who pays them? That's right, you do. You will pay these fees one way or another.
The "No Cost Mortgage" advertisement that I recently saw was promoting the fact that they pay your closing costs for you with checks they write themselves out of their bank account. Great concept, but does it really make sense that your mortgage broker or lender would really write the checks to pay for your mortgage if they were not getting paid as it might sound like in the case of a "no cost mortgage"? I'll answer this question for you: no it does not make sense. So what is the catch?
The mortgage company charges you a higher interest rate. If you are paying a higher interest rate, then your monthly payment is higher. So your higher payment month after month pays your closing costs over time. Now, this is not necessarily a bad thing if you know what you are getting into. Where I have a beef with this type of advertising is that it is not telling you the whole truth. You do have closing costs and the mortgage company is charging you a higher interest rate to compensate for those fees - and they do not tell you this in the advertising. They lead you down some fantasy of a no cost mortgage, or a free mortgage, and ultimately charge you a higher interest rate than you would normally get if you paid your costs either with your loan proceeds in a refinance or out of your pocket in a purchase mortgage. The misleading advertising got you to call them.
What Are The Advantages of a No Cost Mortgage?
Initially, this loan can be good if you are low on cash. Hey, it is not a bad loan in the short term. Let's just say that the interest rate that they charge you increases your monthly payment $150 a month for a no cost mortgage. After 30 months, or 2.5 years you have paid $4,500 extra. What if that was the amount of your closing costs when you first got the deal? Well, for the first 30 months you saved money and were better off. However, once you hit month 31, you are now paying more for your mortgage's closing costs than you would have if you had paid them up front when you got the mortgage.
Another thing to be careful about with this type of mortgage is that it is very easy for a mortgage company to charge you more than might have been able to charge you because their profit is made in the interest rate and in the slightly higher interest rates. With this said, it is hard to tell how much a mortgage company makes on your loan given your payment increases slightly over what you could have been paying if you had paid your own closing costs.
The "No Cost Mortgage" advertisement that I recently saw was promoting the fact that they pay your closing costs for you with checks they write themselves out of their bank account. Great concept, but does it really make sense that your mortgage broker or lender would really write the checks to pay for your mortgage if they were not getting paid as it might sound like in the case of a "no cost mortgage"? I'll answer this question for you: no it does not make sense. So what is the catch?
The mortgage company charges you a higher interest rate. If you are paying a higher interest rate, then your monthly payment is higher. So your higher payment month after month pays your closing costs over time. Now, this is not necessarily a bad thing if you know what you are getting into. Where I have a beef with this type of advertising is that it is not telling you the whole truth. You do have closing costs and the mortgage company is charging you a higher interest rate to compensate for those fees - and they do not tell you this in the advertising. They lead you down some fantasy of a no cost mortgage, or a free mortgage, and ultimately charge you a higher interest rate than you would normally get if you paid your costs either with your loan proceeds in a refinance or out of your pocket in a purchase mortgage. The misleading advertising got you to call them.
What Are The Advantages of a No Cost Mortgage?
Initially, this loan can be good if you are low on cash. Hey, it is not a bad loan in the short term. Let's just say that the interest rate that they charge you increases your monthly payment $150 a month for a no cost mortgage. After 30 months, or 2.5 years you have paid $4,500 extra. What if that was the amount of your closing costs when you first got the deal? Well, for the first 30 months you saved money and were better off. However, once you hit month 31, you are now paying more for your mortgage's closing costs than you would have if you had paid them up front when you got the mortgage.
Another thing to be careful about with this type of mortgage is that it is very easy for a mortgage company to charge you more than might have been able to charge you because their profit is made in the interest rate and in the slightly higher interest rates. With this said, it is hard to tell how much a mortgage company makes on your loan given your payment increases slightly over what you could have been paying if you had paid your own closing costs.
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| No Cost Mortgages - Are They Really No Cost? |
So, the next time you hear of this kind of mortgage program, make sure you ask about the difference in your monthly payment between paying your own closing costs, or for paying a higher interest rate. If you know you are only going to be in the home for a few years and then you are going to sell the home, then a no closing cost mortgage might good for you. If you are planning on staying longer and you know you are going to refinance in the near future, then this loan might be good for you too. But, if you do not want to refinance in the future, or be forced to have to refinance to get out of a no cost mortgage when it starts costing you money then the no cost mortgage probably is not right for you. Make sure you take a look at all your options. Do not let a slick mortgage person tell you that this loan saves you money - as this is not necessarily the case.
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