- The Facts about “No-Cost Mortgage Loans".
The greatest truth I can possibly tell you it's something already know:
“There is NO FREE LUNCH”
Burn that into your brain. No one can work for nothing. You can't afford to go to work and not get paid. Neither can a loan officer, mortgage company or bank possibly afford to do a mortgage loan for absolutely nothing. The loan officer can't feed their kids and the mortgage company or banks can't stay in business. If you can believe that mortgage companies do loans for no profit just about as much as you can believe car dealers sell their cars “at or below factory invoice.”
Even if the loan officer and the company were willing to do the loan at a true”no cost mortgage loan”, there are other “hard costs” involved in the loan. Items like: lender fees, attorneys fees, title search, intangible taxes, recording fee; just to name a few, must be paid by someone.
So how can a company or offer a”No Cost Mortage Loan’?
About the only way this can be done is through a concept called”Above Par Pricing.” Most people have heard of paying” discount points” to buy a rate down. That is, someone (in the old days it was usually a builder), would pay a discount (a “point” is 1% of the loan amount) to the lender so the buyer/borrower would give a lower rate.
You see, mortgages are priced just like bonds. There is a”Par” price and then there is a discount price and an above par price. So, instead of someone paying discount points to buy a rate down, if a mortgage company provides a loan where the rate is above par, the mortgage company receives a premium. This is usually called a “Yiled Spread Premium.”
In a”No Cost Mortgage Loan", the mortgage company uses the Yield Spread Premium to cover all the costs of the loan and the mortgage companies profit as well.
So, does this mean the mortgage company is cheating or ripping- off the consumer? No, not at all, It all boils down to options.
For instance, on a purchase the borrower has three options:
- Pay the closing cost out-of- pocket
- Negotiate for the seller to pay the closing cost.
- Pay a slightly higher interest rate on the loan and have lower cash out of pocket.
On a refinanced the borrower has three options as well:
- Pay the closing cost out of pocket;
- “Roll” the closing cost into the loan. This simply means that the costs are added to the loan so the costs are being financed into the loan amount. This reduces the borrower's equity.
- Pay slightly higher interest rate on loan and have no cash out of pocket and not invade their equity.
Any of these options can be good or bad depending upon the individual borrower’s situation. That's why a competent mortgage professional will ask lots of questions before proposing a loan program and providing an interest rate.
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Midwest Home Funding LLC
2200 South Main Street Suite 304
Lombard, Illinois 60148
Office Direct 630.599.3106