About the 'No closing costs' mortgage

Mortgage and Lending with 1st Metropolitan Mortgage

With the number of home sales rising again in many markets, mortgage companies are getting more competitive in promoting home loans. They are more strict in qualifying mortgage applicants, responding to lessons learned from disastrous loans over the past couple of years. They are now using some marketing techniques that have been used for years, such as offering "no closing cost" loans.

There's no such thing as a "no cost" mortgage loan. There are always costs, such as fees for appraisals, escrow services, recording, notary, tax service and others. Each of these services require a payment, and they will be paid by the borrower in one form or another.

Typically, with a loan advertised as "no cost" the actual costs are lumped together and added to the loan balance. The costs are financed, like the purchased home. This means the payments will be slightly higher each month due to the larger balance. The added amount can add up to a substantial sum over the years - more than the total amount for the loan-related costs if they were paid at closing. Another method lenders use to recover their closing expenses is to simply increase the interest rate. This, again, results in higher payments every month and is definitely not cost-effective for the borrower in the long term.

In some cases it makes sense for a borrower to accept a "no cost" mortgage. This is usually when the buyer has no cash available for mortgage fees after paying the down payment. Accepting such a loan might be the only way to make a home purchase possible at this time. But the buyer-borrower should fully understand the provisions of the loan and how the closing costs will be paid.

Comments (3)

Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Tony - AMEN!  Like you, I tell my clients (for nearly eight years now), "there's no such thing as a no cost loan.  One way or another, YOU (Mr/Ms borrower) are going to pay for your costs".  I try real hard not to laugh at the ones who argue with me that so and so bank assured them that they would not be paying any costs with their loan.  Of course, when I ask if they got that in writing or if they were given a GFE - NADA!

It's so important (now more than ever), that we (honest, ethical & conscientious LO's) continue to educate consumers on the mortgage loan process and the realities of getting a good loan.

Jul 21, 2009 10:03 AM
Tony Donato
1st Metropolitan Mortgage - Manasquan, NJ

Thanks Donne,

   Its what makes the struggle a little harder. I try never to bash competition when Im selling a loan, but our worst competition  is a dishonest loan officer.

Jul 22, 2009 01:12 AM
Laura Giannotta
Keller Williams Realty - Atlantic Shore - Little Egg Harbor, NJ
Your Realtor Down the Shore!

You can't get something for nothing!  This is great info I'll pass along to my buyers.

Jul 22, 2009 02:23 AM