“No Closing Costs” Loan? Think Again.
I recently had two clients opt to use an online lender rather than me for their financing. The reason? They believed they were going to get a VERY low interest rate AND pay “no closing costs”. That’s right. Gonna buy a home with nothing more out of pocket than the down payment!
I explain to clients that, with extremely rare exceptions, the only way to avoid or minimize closing costs is through the lender credit associated with the interest rate. The higher the rate, the higher the borrower’s credit for closing costs.
Face it—the title company doesn’t work for free. Impounds must be prepaid. The hazard insurer doesn’t give away free policies. These costs must be paid, either directly by the consumer at closing or via a lender credit associated with the rate.
So where are home buyers getting the idea that they can buy a home bringing in only the amount of the down payment while getting an extremely low interest rate?
Let’s look at CashCall as an example. As of today, their Web site reads:
Today's Advertised Special - "No Closing Costs"
3.99% / 3.99% APR
Today's low 30 year fixed rate as of 01-06-12
Apply Online or Call Now!
Great rate! And no closing costs!
But notice there’s a link to closing costs disclosures. The disclosures say:
'No Closing Costs' loans
The following Fees are covered on a 'No Closing Costs' loan.
On purchase transactions the 'No Closing Costs' option covers the cost of the appraisal fee, credit report fee, flood certification fee and tax service fee. The borrower is responsible for paying all title fees, escrow/closing fees, notary/signing fees, prepaid interest, property taxes, state mortgage taxes, insurance, mortgage insurance and recording fees.
Uh-oh. Looks like you are paying closing costs after all!
But there is more in those disclosures:
Please note that for the 30 Year No Closing Costs 3.99% and 10 Year No Closing Costs 2.99% advertised rate specials, the following pricing adjustments apply: Loan amounts from $300k to $417k priced as shown. Loan Amounts $250k-$299,900 add .135 to rate. Loan Amounts $200k - $249,900 add .26 to rate. Loan Amounts $150k to $199,900 add .385 to rate.
So, unless you are financing $300,000 or more, you aren’t getting the advertised 3.99% rate.
The lesson here is not to trust your largest financial transaction to a person working in a Web site’s call center. Find a reputable person in your state who can be reached during and after business hours by cell phone. They will provide you a no fine print rate quote customized to your specific financial situation.