I actually went into the bank lobby yesterday and noticed an advertisement for a "No Fee Plus Mortgage". After reading the terms and conditions of the offering, I realized that it was no great bargain but a pretty smart marketing ploy. Here's what I saw (the date was partially cut off but it was June 20, 2008):
This means that the bank is absorbing some $3,500 in costs, on a $320,000 loan but charging a discount fee of 1.312 % (or in this case, some $4198.40). So, the total charges for the bank's "no fee mortgage plus", at 6.5%, would be $4,198. I would offer the same loan terms for the $3,500 in costs.
Advantage: Brady by about $700 for the 30 year fixed rate loan at 6.5%.
On the 5/1 ARM example, at $320,000, I would charge the $3,500 in fees plus 1.25% for a discount fee, totaling $7,500 in costs. The bank offering absorbs the $3,500 in costs but charges the borrower a discount fee of 2.228 % or $7296.
Advantage: The Bank by about $300 for the 5/1 ARM at 5.5 %.
It's just prestidigitation and the mortgage industry is famous for it. Banks, brokers, we all go to the same place for funding (Wall Street).