Comments on: Are No Closing Cost Mortgages A Scam?

By: jim

jim — Fri, 06 Apr 2007 02:53:34 +0000

Look at you sneaking in that link… I see what you’re doing.

By: fivecentnickel.com

fivecentnickel.com — Fri, 06 Apr 2007 02:15:32 +0000

In my case (read about it here since Jim mentioned it but didn't link it) they were recovering their costs based on negative points. So par (= no points) was 5.875% and they were offering 6.125% with no costs (not even third-party costs). So by accepting a higher rate, there are negative points (i.e., paid to borrower) that swallow up the closing costs. On top of that, the broker makes a commission for handling the deal.

By: Anonymous

Anonymous — Thu, 05 Apr 2007 17:06:14 +0000

I agree Jon, I think ti would be impossible to find a loan with no points and no closing costs that did not add these to the balance of the loan or perhaps the loan has a slgiths higher interest rate. It would take just a tiny difference in the interest rate for the bank to earn WAY more than enough to make up up for the “free” clsoing costs.

Nothing in life is realyy free….especially when you get a bank involved (I work for one).

By: pfodyssey

pfodyssey — Thu, 05 Apr 2007 16:50:00 +0000

I agree with Jon. In my experience, the “no-fee close” was always paired with about a quarter percent increase in your mortgage rate. However, I haven’t minded this as it has provided me with a lot of flexibility in terms of refinancing in a market where interest rates are going downward. For example, if I’m having to shell out $3000 each time I refinance, I will be a bit choosy in terms of how often I do this (it becomes a sunk cost).

However, if I’m just rolling it into the rate, I can do it many more times because I’m not out any hard cash that can’t be retrieved (again, the sunk cost). Although I certainly am “paying” for it, it is more than offset by the amount I save the next time I refinance at a lower rate. I did this quite a bit as I rode down our mortgage from a starting rate of 8.25% down to 4.75% over about a 5 year period.

By: dong

dong — Thu, 05 Apr 2007 15:43:40 +0000

Yeah, they get you one way or another. A lender will never a true no closing cost mortgage at the same rate as a closing cost mortgage. As Jon said, they just backend the closing cost into the interest rate.

Having gone through refinances, it’s always unclear even when I work out the math if I’m up or down (short term) just because of all the partial interest payments depending on the closing date. All very confusing.

By: Jon Morrow

Jon Morrow — Thu, 05 Apr 2007 15:06:27 +0000

There are a couple of ways to do this. First, sometimes mortgage bankers (direct lenders) offer to forgo closing costs as an incentive, but in my experience, it’s relatively rare. What usually happens is they wrap the closing costs into the loan balance. You still pay it, but not out of pocket.

Some mortgage brokers will also entice buyers by offering to pay their closing costs. Then they increase the interest rate to slightly above the lender’s minimum rate. The lender pays them a higher backend spread (commission), and they use the money for your closing costs.

So, you almost always end up paying them. It’s just a matter of how.

Jon