by Kevin Schram of Asap Mortgage
How many times have you been relaxing, watching your favorite shows when you see the greatest mortgage deals of your life time flash across the screen? Maybe you’ve heard, “No Closing Cost Refi, No Points, No Credit Report or Processing Fee” or perhaps it was, “No Teaser Rates, No Hidden Fees, No Pre Payment Penalty?” My personal favorite is, “You can get a $400,000 loan for only $1065/month!!!!” WOW, I’ll take two!!!!!
Now, there are certain facts in life, such as: the sun sets in the west, the Bears and the Packers will play at least twice a year and when the cows out in the pasture are lying down, it is going to rain. Well, perhaps the last one isn’t necessarily a fact of life but I’d think twice about heading to lake when you see the cows lying down. Another fact is there isn’t a lender in business that is going to give you a free loan. Shoot, if you find a lender that is doing this, let me know. They apparently have more business then they can handle and I’d love to work for them. The fact is every loan has costs associated with it. The lender has fees, the title company has fees, there will be broker fees if you utilize their wonderful services, there are fees you can’t get around such as pre paid interest and setting up escrow accounts for taxes and insurance.
So here are some facts behind these advertised loans. They are all assuming an 80% loan to value ratio, you will need to put down $40,000 on a $200,000 loan to achieve this. You will also need excellent credit, typically 720 plus. A “No Closing Cost Loan” means the lender has to come up with this money somewhere and they are not going to pay for it themselves. This is going to be reflected in your rate. The ad I saw suggested closing costs of $3,300 so as of today’s rates that would put a buyer at a rate of 6.25% to almost cover those costs. Not bad but wait! The lender isn’t going to make any money at that rate. A fair profit for a lender on a loan of this caliber is 1% of the loan amount. That pushes the rate up to 6.625%. Ok, not terrible but wait! What if you want to escrow for your taxes and insurance? You will have to set up those accounts by pre paying for the months that have gone by plus a 3 month cushion. For example, say taxes are $300/month and insurance is $40/month. That would be $340 x 7 months, assuming an April closing, which is $2,380. To cover the $7,680 in total fees your rate would be at or above 7.25% and even at that rate it isn’t enough. So, at the end of the day you could end up with a rate of 6.125%, pay your closing costs yourself and save almost $150/month and in a little over 4 years recoup your costs or you could get that “no closing cost loan” and pay over $50,000 more over the 30 year life of the loan to keep a little extra in your pocket now.
$200,000 @ 7.25% = $1,364.35/month P&I
$200,000 @ 6.125% = $1,215.22,/month P&I
Advertising these loans are a great way to get the phones to ring but it isn’t the best way to choose a loan. Perhaps the best way to find the right loan and the right loan officer is by asking your Realtor. They work with lenders almost daily and will be able to recommend some professionals that are trustworthy. And when it comes to any advertising, always read the fine print!