The Real No Cost Mortgage is it really the real deal? I have been in the mortgage business since 1996, and so far I have never come across a Real No Cost Mortgage. Never ever. The Real Deal to No Cost Mortgages is that all mortgages have costs associated with them.
I shudder each time I see or hear advertising about this type of mortgage, especially in light of the mortgage industry collapse in 2007. I try really hard to not think about the folks that really get this mortgage and do not get told the truth about it. Keep reading for the Real Deal or Truth about these no cost mortgage offers.
How Do No Cost Mortgages Work?
Most No cost mortgage programs are all designed the same way: the interest rate of the loan is increased to cover the costs associated with the mortgage. Like I started out with this article, all mortgages have costs associated with them such as: paying a processor to process your loan, the cost for an appraisal, the underwriter, the title insurance policy, your credit report, tax and insurance escrows, and of course the money that your loan officer makes in their commission. All of these fees in one form or another get paid, and guess who pays them? That's right, you do. You will pay these fees one way or another.
There are a select few mortgages that have very little costs associated with them: these are home equity lines of credit; or HELOC'S. Often you can get these little or no cost loans at your local credit union or small community bank. These loans typically only allow you to borrow up to about 90% of your home's value.
As of today in April of 2008, while HELOC's are available, many homeowners who try to get them are finding that they are hard to get. The banks that offer these loans are using automated valuation methods AVM to determine value. AVM's in a declining market are extremely conservative.
Let me give you an example: I recently did a loan for a customer who had her home appraised in January 2008 for $400,000 and in late February the AVM where we sent her loan application to get her a HELOC valued her home at $285,000. With this kind of result, my customer was not able to get her HELOC, even though they had perfect credit, easily qualified with their debt to income ratio etc. One possible reason why Credit Uninos and smaller banks might be able to get around the conservative AVM's is that they might offer it to either as a courtesy to get you or keep you as a banking customer.
The New No Cost Mortgage Advertisement
A recent No Cost Mortgage advertisement that I saw was promoting that they had the Only Real No Cost Mortgage. They were promising the fact that they would pay your closing costs for you with checks they write themselves out of their bank account. Great concept, but in order for them to pay your closing costs they charge you a higher interest rates so that they get paid more money from the mortgage investor this is making the mortgage for you. If you think about it, does it really make sense that your mortgage broker or lender would really write the checks to pay for your mortgage if they were not getting paid as it might sound like in the case of a no cost mortgage? I will answer this question for you: no it does not make sense. So what is the catch?
As I just mentioned, the mortgage company charges you a higher interest rate. If you are paying a higher interest rate, then your monthly payment is higher. You can then think of it this way, with a higher payment - more mortgage interest that you are paying the mortgage lender - you end up paying your closing costs over time.
Now, this is not necessarily a bad thing if you know what you are getting into. Where I have a beef with this type of advertising is that it is not telling you the whole truth. You do have closing costs and the mortgage company is charging you a higher interest rate to compensate for those fees - and they do not tell you this in the advertising. They lead you down some fantasy of a no cost mortgage, or a free mortgage, and ultimately charge you a higher interest rate than you would normally get if you paid your costs up front at closing. The misleading advertising got you to call them.
What Are The Real Advantages of a No Cost Mortgage?
Initially, this loan can be good if you are low on cash. For the short term, this is not a bad loan strategy. Let us just say that the interest rate that they charge you increases your monthly payment $150 a month for a no cost mortgage. After 30 months, or 2.5 years you have paid $4,500 extra. What if that was the amount of your closing costs when you first got the deal? Well, for the first 30 months you saved money and were better off. However, once you hit month 31, you are now paying more for your mortgage than you would have if you had paid them up front.
How Do I Know What The Mortgage Broker Is Paid?
Another thing to be careful about with this type of mortgage is that it is very easy for a mortgage company to charge you more than they might have been able to charge you if you had paid your own closing costs. Mortgage Brokers are paid from the lender based on the interest rate that they charge you. The higher the rate, the more money the Broker can make. With this said, it is hard to tell how much a mortgage company makes on your loan given your payment increases slightly over what you could have been paying if you had paid your own closing costs.
So, the next time you hear of this kind of mortgage program, make sure you ask about the difference in your monthly payment between paying your own closing costs, or for paying a higher interest rate. If you know you are only going to be in the home for a few years and then you are going to sell the home, then a no closing cost mortgage might good for you. If you are planning on staying longer and you know you are going to refinance in the near future, then this loan might be good for you too. But, if you do not want to refinance in the future, or be forced to have to refinance to get out of a no cost mortgage when it starts costing you money then the no cost mortgage probably is not right for you. Make sure you take a look at all your options. Do not let a slick mortgage person tell you that this loan saves you money – as this is not necessarily the case.
