There is No Such Thing As a "No Cost Mortgage!" How Mortgage Originators Get Paid
Title companies don't work for free.
Appraisers don't work for free.
The County Recorder doesn't record mortgages for free.
These companies and others are usually involved in every mortgage transaction.
If they aren't working for free, who is paying them? The answer is easy; in one way or another, the borrower always pays these fees when refinancing their home.
Mortgage companies and banks don't work for free either.
Mortgage origination companies make money on your loan transaction in a number of ways.
They may charge up front fees.
These fees may be called a number of different names, but basically they have to be paid by you or for you.
The company may charge reduced fees or offer a "no cost option", but this will result in a higher interest rate than if you paid the equivalent fees in cash or through the loan proceeds.
Thirdly, they may balance out the money they need to make with a combination of rate and fee structure.
If you don't pay the fees directly, then the mortgage company is paying them for you from the profit they make on reselling or servicing your loan.
Every loan that involves a note has an actual market value that depends on the amount, term, and interest rate of that note.
If you own a home now, you probably know that mortgage companies buy and sell these mortgages to each other frequently.
Simply put, the higher the balance and the higher the rate, the more the mortgage is worth in actual dollars when it is sold to another mortgage company.
As an example, if you are refinancing a $150,000 loan, the difference in the "cash value" of that loan to the mortgage company is about $3000 higher for a note rate of 8% than it is at 7%.
If the mortgage company is trying to make $2000 gross profit on the loan, they can pay up to $1000 in closing costs for you and still make the money they need by charging you the higher rate.
In this case, you will pay more each and every month by way of the higher rate instead of paying the fees at closing.
As you can see, this should be called a "lender-paid cost" option not a "no cost" loan or even a "no cost option".
The last two terms are grossly misleading.
(Note: Mortgage Brokers disclose this anticipated gain on sale, Mortgage Bankers and Commercial Banks DO NOT.
) Is it better to pay lower fees and a higher rate, or higher fees and a lower rate? The answer to this question is totally dependent on your situation and your long-term plans for the home.
If you are only going to be in the home for another two or three years, it doesn't make sense to pay high fees for a low rate that you won't have time to derive benefit from.
On the other hand, if you are planning on staying in the house for 10 or more years, it rarely makes sense to take a "no cost" loan and then pay a higher rate forever.
In cases where you don't have much equity and don't want to come out of pocket with closing costs, the "lender paid costs" option may be your only choice.
It might make plenty of sense to do that depending on the rate you are paying now and the other issues mentioned above.
It's obvious that this is more complicated than just some mortgage company bellowing about their "no cost" loans or their "low, low rates".
You need professional advice from someone who will answer all these questions honestly AND completely.
Be sure you get all the information you need to make a SMART refinancing decision.
Appraisers don't work for free.
The County Recorder doesn't record mortgages for free.
These companies and others are usually involved in every mortgage transaction.
If they aren't working for free, who is paying them? The answer is easy; in one way or another, the borrower always pays these fees when refinancing their home.
Mortgage companies and banks don't work for free either.
Mortgage origination companies make money on your loan transaction in a number of ways.
They may charge up front fees.
These fees may be called a number of different names, but basically they have to be paid by you or for you.
The company may charge reduced fees or offer a "no cost option", but this will result in a higher interest rate than if you paid the equivalent fees in cash or through the loan proceeds.
Thirdly, they may balance out the money they need to make with a combination of rate and fee structure.
If you don't pay the fees directly, then the mortgage company is paying them for you from the profit they make on reselling or servicing your loan.
Every loan that involves a note has an actual market value that depends on the amount, term, and interest rate of that note.
If you own a home now, you probably know that mortgage companies buy and sell these mortgages to each other frequently.
Simply put, the higher the balance and the higher the rate, the more the mortgage is worth in actual dollars when it is sold to another mortgage company.
As an example, if you are refinancing a $150,000 loan, the difference in the "cash value" of that loan to the mortgage company is about $3000 higher for a note rate of 8% than it is at 7%.
If the mortgage company is trying to make $2000 gross profit on the loan, they can pay up to $1000 in closing costs for you and still make the money they need by charging you the higher rate.
In this case, you will pay more each and every month by way of the higher rate instead of paying the fees at closing.
As you can see, this should be called a "lender-paid cost" option not a "no cost" loan or even a "no cost option".
The last two terms are grossly misleading.
(Note: Mortgage Brokers disclose this anticipated gain on sale, Mortgage Bankers and Commercial Banks DO NOT.
) Is it better to pay lower fees and a higher rate, or higher fees and a lower rate? The answer to this question is totally dependent on your situation and your long-term plans for the home.
If you are only going to be in the home for another two or three years, it doesn't make sense to pay high fees for a low rate that you won't have time to derive benefit from.
On the other hand, if you are planning on staying in the house for 10 or more years, it rarely makes sense to take a "no cost" loan and then pay a higher rate forever.
In cases where you don't have much equity and don't want to come out of pocket with closing costs, the "lender paid costs" option may be your only choice.
It might make plenty of sense to do that depending on the rate you are paying now and the other issues mentioned above.
It's obvious that this is more complicated than just some mortgage company bellowing about their "no cost" loans or their "low, low rates".
You need professional advice from someone who will answer all these questions honestly AND completely.
Be sure you get all the information you need to make a SMART refinancing decision.
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