Several weeks ago, Bank of America announced to the world that they were going to change the mortgage world by offering their No Fee Plus mortgage.  This mortgage is supposed to be revolutionary in that it offers the following:

• -Up to 95% financing with one loan
• -No Private Mortgage Insurance (PMI) required
• -No tax escrows
• -No closing costs (lender or title fees)
• -Purchases only, refinances not eligible

Bank of America is so confident that they will pay up to $250 dollars if their borrowers find a cheaper mortgage elsewhere. 

First, what is being offered is nothing new.  Good mortgage brokers have been structuring mortgages like this for years.  You don't want to pay PMI?  Fine, we give you lender paid PMI or a second mortgage.  You don't want to escrow taxes?  Fine, you have a choice.  Just ask.  Don't want to pay closing costs?  Fine, your rate is slightly higher and we can waive all closing fees.  It is all how you structure the loan.   This is the difference between dealing with a professional who can develop varying programs for your particular situation versus an order taker working in a call center.  All of my clients know I can structure a loan anyway they want.

I decided I would call BofA today to see if they are really offering a good deal or just playing a shell game with consumers.  I rarely lose deals to bloated retail banks, so I figured this wouldn't be any different.  I had the "mortgage specialist" price out a very simple scenario of:

• $400,000 purchase price
• Single Family Home
• 740 FICO Score
• No Points
• 30 Year Fixed Rate
• 5% Down Payment

After telling me that BofA is the only lender than can do offer the No Fee Plus mortgage, she quoted me a rate of 7.125%.  I randomly picked a rate sheet of one of the 10 or so major "A paper" lenders I like to use.   At 7.125%, I would have been earning a yield spread premium (profit) of 2.422% or a whopping $7,750!  At this rate, I can easily give up $3000 to pay lender and title fees and still have $4750 in profit!

However, the goal is to beat the deal.  So I priced a first mortgage at 6.875% and a second mortgage at 8% so we can avoid PMI.   I was still making 1.522% in YSP on the first and .5% on the second for a total of $5266.44.  Again, I can easily give up $3000 to cover the borrowers lender fees and title fees and still net $2266.44.  Not bad for a days work. 

The borrower gets a better deal with my loan as the combined mortgage payment of the first and the second mortgage is about $18 per month cheaper.   The bottomline folks is that nothing is for free.  You are going to pay for it somewhere.  What I found hilarious is that they talking head on the website swears that they don't raise the interest rate to cover costs.  Either someone in their marketing department is lying or their rates suck.

To be fair, the BofA deal may actually be pretty good if you have a very small loan or marginal credit.  However, I do not know if they change their terms based on the loan size or what they are requiring for a minimum FICO.  Marginal credit buyers are going to have much higher rates on second mortgages which may make getting one loan with no PMI more attractive.  It is also harder to give competitive rates and large closing cost credits with smaller loans as well.  Sometimes retail banks can be more competitive on puny deals because they will just eat the loss.

Nevertheless, they are offering to pay $250.00 if you get a better deal elsewhere.  I am going to start my own marketing campaign where I will guarantee that BofA will pay you $250!  Call them first and then call me.  I will split it with you.

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