Mortgage Refinance Guide

You’ve probably seen the television ads claiming that no cost mortgage refinancing is “a no brainer.” Advertisers love to claim that they’ll pay your closing costs and offer zero cost refinancing. Most homeowners responding to these offers don’t realize how much of a lie no cost refinancing is. Here is the truth you need to know about the no cost mortgage refinancing lie.

Most homeowners don’t understand how mortgage lenders make their money. The majority of lenders today don’t sit on your loan collecting interest month in and month out. Most lenders make their money by selling loans to investors on the secondary market; the profit they make by selling your loan is called Service Release Premium. The fact that lenders sell your mortgage loan has more to do with you than you think; lenders reward brokers for charging you an above market interest rate to boost their profits when the loan is sold.

Your mortgage broker simply acts as an agent reselling loans for a wholesale lender. Mortgage brokers mark up the interest rate you qualify because the wholesale lender pays them a bonus for every .25% they overcharge you. This means the loan you get is anywhere from 100 to 150 basis points higher than what you could have had. This is why the average homeowner gets a retail rate on their mortgage loan. The interest rate has been marked up to give the broker a bonus.

The problem with this markup is that most brokers do not tell you what their doing and frequently omit what they’re doing on your Good Faith Estimate. Because you’re already paying your mortgage broker a fee for originating your loan any markup of your mortgage interest rate for a commission is not only unnecessary, but is taking advantage of you as a consumer.

In addition to marking up your mortgage interest rate for a profit, many brokers invent fees when processing your loan. These junk fees are often for thinks like “locking in your mortgage rate,” “application fees,” and “courier fees.” Most of these junk fees go straight into your mortgage brokers pocket for no good reason. So what about these companies claiming to offer no fee mortgage loans?

No Fee Mortgage Refinancing is a Lie

The truth is that every mortgage has legitimate fees that must be paid. If the lender is paying these fees upfront they are being paid on the back end in the form of Service Release Premium. When you refinance your mortgage with a “no fee” mortgage you’ll be accepting a much higher mortgage rate meaning that you’ll pay more than you need to for the loan. The lenders know they’ll make up the fees they’ve paid for you and double, even triple their profits when the loan is sold on the secondary market. You’ll be stuck paying hundreds of dollars more each month while the lender makes a handsome profit selling your loan. You can learn more about your refinancing options, including expensive pitfalls to avoid with this free mortgage tutorial.

Everyone has seen the ads on television, or heard about some bank testing a “no closing cost” mortgage loan, but aren’t these loans just a gimmick to reel you in? Truth be told there is no such thing as a “no cost mortgage;” you always pay one way or another. One way mortgage companies and banks offer no ost loans is by talking about their charges and no one else’s. This could refer to processing or origination fees and not the third party settlement charges due at closing.

There is usually an asterisk associated with these offers and a lot of fine print indicating that other fees will apply. Other offers might state”no lender fees” and while this is much closer to the truth borrows should know they make up the difference elsewhere. A true no closing cost loan would mean that you do not pay for anything. Attorney fees, credit checks, title insurance, and all settlement fees would be paid for you. The problem is there are a lot of third party companies involved and someone has to pay them for their services.

If you don’t pay third party companies involved with your mortgage, it means the lender will have to pay them. When the lender pays the settlement charges, you pay the lender in the form of a higher interest rate. You pay a higher mortgage rate in exchange for the mortgage company paying your closing costs. Is this a no cost mortgage loan? Not when you’re paying that higher interest rate for the entire duration of your loan.

You can learn more about your mortgage options, including costly mistakes to avoid with our free mortgage video tutorial.