No-Fee Mortgages May or May Not Be Cheaper

So that they might be competitive, a number of lenders are now advertising so-called "no fee" home financing. According to advertising from a number of loan companies, you can take out a loan where you only pay interest; there are no additional fees at closing. Can you really save money with a no fee loan?

As usual with this kind of promotion, the answer is "perhaps, or perhaps not." A mortgage company is not going to just cancel charges that can amount to nearly 3%-5% of the amount of the loan. Any company that just eliminated a source of revenue would soon go out of business, as those charges contribute to their bottom line.

How do no fee mortgages work? The loan company will charge you a higher rate of interest than a company that charges closing costs will. Their profit has to originate somewhere; it will come from raising the price to borrow the money. That isn't exactly bad; it just means that they are charging you differently. The higher rate might make the loan more attractive to buyers on the secondary market. The company may make some additional cash by re-selling your mortgage to another company at a later date.

What does this mean for you, the customer? As with any mortgages or anything else that you buy of value, you should compare lenders before settling on a lender. Each lender will have different ways of making their revenue; some will charge increased rates, others will charge steeper fees at closing. Only when you assess the total cost, including how much in total you will pay over the life of the loan, will you be able to determine who is providing the best deal. The only way you can see who is offering a good deal is to compare the costs of all the loans and crunch some numbers.

Is the offer a scam? No, but it is a bit deceiving. The lenders, through their advertising, want you to believe that you are paying less, as suggesting that there are no closing costs might make you think that you are getting a bargain. You might not be actually getting a bargain, but the claims makes for good advertising. Smart consumers are generally suspicious when an offer seems too good to be true. Anytime you think about applying for a home loan, you should assess all of the quotes from all of the lenders you talk to so that you might find the mortgage that best meets your needs.

By: essmeier