Several national banks have recently been bragging about their “no fee” mortgage loans. The problem with these “no fee” mortgage loans is simple: banks are exempt from the Real Estate Settlement Procedures Act. In 1999 the Banking Lobby had our nation’s disclosure laws changed to exclude themselves from legislation that requires mortgage lenders to disclose their profit margins. Because your Bank is not required to disclose their profit margins you will never know how much they have marked up your mortgage interest rate. If you want to avoid overpaying for your mortgage you should never take out a mortgage loan from a bank.
What can you do if you really need one of these “no fee” mortgage loans?
No fee mortgages are useful for people that don’t have the required for closing costs. The problem with most of these loans you see advertised is that the tradeoff for not paying your closing costs is a significant increase in your mortgage rate. The lender jacks up the interest rate promising that you’ll be able to refinance in three years to a much lower rate. You should know that any lender that encourages you to refinance on a regular basis is engaged in predatory lending practices.
There are ways to broker “no fee” mortgages yourself if you understand how mortgage brokers make their money. If you’re a regular reader of this column you should have a good understanding of Yield Spread Premium; however, for the casual reader I’ll give a brief introduction. Yield Spread Premium is the difference between the wholesale mortgage rate you qualified and the interest rate your loan representative locks and closes your mortgage. The wholesale lender pays your mortgage broker one percent of your loan amount for every quarter percent you pay above the rate you qualified.
Should an honest mortgage broker keep this money? You’re already paying them origination fees for their services; what if you asked them to use that money to pay your closing costs? Tell your mortgage broker that you’ll pay a .25% higher mortgage rate if they’ll credit that money from the lender to your closing costs. Sounds too good to be true? Find an honest mortgage broker and you’ll save yourself thousands of dollars doing your “no fee” mortgage this way rather than with that Bank you see bragging about their loan offerings.