I’ve been hearing a lot of advertisements on the radio, in print, and on television where lenders are offering mortgages and refinances with no points and no closing costs, which normally run into thousands and thousands of dollars. So how can they do it? How can they originate the loan, pay their people, and still turn a profit? Well there are two ways they can make their money – collecting interest over the life of the loan or by selling it to another bank and pocketing a finders fee of sorts. Since I’m not in the banking industry, this is all based on things I’ve seen and not any sort of professional knowledge, so take it for what it’s worth.
Nickel just analyzed a refinancing offer where he could lower his interest rate and after some math recognized that he could save $12,500 on the total cost of his home, so these clock-reseting (referring to the 30 year clock) mortgages aren’t necessarily trying to screw you by getting you to pay more in the long run by offering a lower monthly payment (be sure to do the math because they might be), so what’s the rub? Well, what it comes down it is that right now Bank A is earning the interest money at, say, 6.5% for the next thirty years and Bank B would like to be earning that interest for the next thirty years even if it’s at only 6.25%. Over the life of a 30 year loan, Bank B, at 6.25%, still earns over $243k on a $200k mortgage and a large portion of that interest will be paid in the first few years – that makes $5 in closing costs seem petty doesn’t it? (mortgage calculator )
Now, the second reason they might do it has a little less in terms of quantitative proof since I’m not in the industry but I bet they are able to package loans together and sell them to larger banks based on the aggregate credit ratings and interest rates on the borrowers and loans. I bet they’re able to sell those loans for a pretty penny, more than enough to cover paying their people to originate the loan.
So, in short, no closing cost, no points mortgages are not necessarily scams as long as you’re dealing with reputable people. As always, in any industry, there will be some charlatans and scammers so be sure to do your due diligence.