No-fee mortgages coming soon

Home equity loans the model for the no-fee mortgage

It can be a complicated and trying experience to purchase a home, especially when doing so for the first time. The process seems to drag out for months as the mortgage company demands checks of credit, proof of employment, proof of earnings, an appraisal of the home

and seemingly endless other items. Complicating matters and adding to the angst associated with buying a home is the long list of fees that are added to the cost of the loan, be it a home equity loan or a mortgage. Besides the cost of the loan itself, this list includes loan origination fees, house appraisal fees, credit report fees, postage fees, document preparation fees and a host of other things that often aren’t even mentioned until they show up on the documents at closing. The would-be homeowner then suffers from sticker shock at closing when they see that the costs of the loan are higher than expected. A few large banks are working on a solution to this, and very soon the “no-fee mortgage” may be commonplace.

The no-fee concept isn’t entirely new, as lenders have been offering home equity loans without fees for several years now. What is bringing the no-fee concept to the regular mortgage business is a combination of aggressive marketing in the ultra-competitive lending market combined with high home prices that have potential borrowers seeking the best deal available in order to keep their payments as low as possible. Dropping the long list of itemized fees is the latest attempt by lenders to woo buyers into doing business with them. The fees will still exist, of course, and that includes the fees that are really just tacked-on profit, such as the “loan origination fee.” The difference is that the fees will simply be added into the cost of the loan itself and the cost of these add-ons will be reflected in a slightly higher interest rate. Lenders feel that by changing the way they structure their loans they can lower the overall costs of doing business. That will allow them to pass on any savings they might have to the borrower.

That may or may not be the case. In practice, corporations that find ways to save lots of money don’t pass on the savings to customers, they pass on the savings to stockholders. Still, the market does remain competitive, and that may force the hand of lenders who might otherwise just be looking to increase their profit.

Those who are interested in obtaining a no-fee mortgage should inquire of the larger lending institutions, as several of them are planning to roll out the product soon. Borrowers should also be aware that the term “no-fee” in “no-fee mortgage” is really a bit of a misnomer, and that “hidden fee” would probably be a more accurate description. By all means, read your loan documents thoroughly, as the no-fee idea may actually make it easier for lenders to hide fees within the structure of the loan.

There is one benefit, though - there won’t be any “sticker shock” when it’s time to close on the loan.