No fee mortgage may not be all that cheap

You should compare prices whenever you shop for a mortgage, even a no fee one

A number of lenders are now offering what they call “no fee” mortgages. With most lenders, there are fees attached to the price of a home loan. In addition to the interest rate that you will pay for borrowing money, there are also additional closing costs, that include discount points, paperwork fees, appraisal charges, document preparation fees and courier fees. These charges can easily add up to several thousand dollars, all of which has to be paid at the time you close on the loan.

In order to be competitive, a number of lenders are now advertising so-called “no fee” mortgages. According to their advertising, you only pay interest; there are no additional fees at closing. The simplification is nice, but why would a mortgage company throw away the money they would otherwise get at closing. Can you really save money with a no fee mortgage?

As usual with this sort of advertising, the answer is “maybe, or maybe not.” Obviously, a mortgage company isn’t going to just eliminate fees that can add up to as much as 3%-5% of the loan amount. That would be foolish, and furthermore, any company that did that would soon go out of business, as those fees are necessary to make a profit. So what is the story?

The answer is a simple one - the loan company is going to charge you a higher rate of interest than a company that charges closing costs will. It’s that simple. Their profit has to come from somewhere; it’s going to come from charging you more to borrow the money. That’s not necessarily bad, however. It just means that they are charging you differently. The company may also make some additional money by selling your home loan to another company later. Its higher interest rate may make the loan easier to sell on the secondary market.

What does this mean for you, the buyer? Nothing really. As with all loans or anything else that you buy of value, you need to shop around before settling on a lender. Each lender is going to have different ways of making their profits. Some will charge higher rates, others will charge higher closing costs. The only way to tell who is offering a bargain is to compare the costs of all the lenders and do the math. Only when you look over the total numbers, including how much in total you will pay over the life of the loan, will you be able to tell who is offering the best deal.

Is the offer a scam? No, but it is a bit misleading. The lenders, through their advertising, want you to think that you are paying less, as suggesting that there are no closing costs might lead you to believe that you are paying less. That isn’t the case, as you well know, but it makes for good advertising. Smart consumers always know to be suspicious when something seems too good to be true. This example is no exception, and anytime you consider taking out a home loan, you should compare all of the estimates from all of the lenders you talk to in order to find the deal that works best for you.

Home shoppers need to realize that loan companies are going to make their profits, regardless of what they advertise. No one is going to forsake some profit just to be nice; they’re going to make their money, and they’re going to make it off of you. .