Chat with Charles

If you have a radio in your car, chances are you’ve noticed a huge increase in the amount of mortgage ads you hear over the airwaves these days. If you believe what you hear, then you might think the banks and brokers advertising there are not only going to make your rate 3.0%, they’re going to pay all your closing fees, give you a new refrigerator and put your children through college, too. Well, my dad (and yours, too, I suspect) always said that if it seems to good to be true, then it probably is. In the next couple weeks, I’ll explain the truth behind the claims you’re hearing. I hope it will help sort “the wheat from the chaff,” so to speak.

The first myth is the most prevalent one, that there is a “no fee” loan out there. One particularly annoying spokesperson coos, “I’ll even pay for your home to be appraised.” Ha! Guess what, friends? There is no free lunch and there is no such thing as a no fee mortgage. What there is, however, is rebate pricing.

When I pick up a rate sheet from any wholesale lender and peruse the day’s 30 year fixed rates, I will always find between eight and 15 rate and fee combinations listed there. Today, for example, the rates begin at 5.50% and increase in .125% increments to 7.00% If you want a 5.50% interest rate, the lender is going to charge you a 1.0% fee to get it (that’s $2,500.00 for a $250,000.00 loan.) If you are willing to take a rate of 7.0%, however, the lender is going to pay your broker or banker a rebate (also known as yield spread) of 3.50%. That’s $8,750.00 on that same $250,000.00 loan amount. Do you think that will cover your closing costs? Voila! The “no fee” loan the guy was promising on the radio.

What’s wrong with this picture? Your closing costs for that loan might total $5,000.00, including an origination fee to your loan officer. Where is the remaining $3,750.00 going, you might ask? Into the broker’s or banker’s pocket, that’s where. We’ve all heard the news stories regarding congressional hearings cracking down on “Predatory Lenders.” Excessive rebate, coupled with extra high origination fees, equals exactly the kind of gouging congress is trying to stop.

In addition, the interest rate on a “no fee” loan is much higher than on a typical conforming loan with closing costs. Clients end up paying far more in interest over a few years than if they had paid the costs up front.

So is there a good time to investigate a “no fee” loan? The answer is yes. If you know with absolute certainty that you’re only going to be in a house for three years or less, you won’t be able to recoup closing costs with lower monthly payments because you won’t be in the house long enough to realize the accumulated savings. Go with the higher interest rate, save the closing costs and get the deal done.

Your best bet is to call your trusted broker and let them help you find the loan that fits you best, not the one that pays tuition for some banker’s kid this year! Like the Rivercrest Mortgage motto says, “The right loan at the right price, closed on time, guaranteed!”