Bank of America recently announced that their no fee mortgage is now available nationwide. Are no fee mortgages simply a marketing gimmick? Before you rush over to the nearest branch there are a few things you need to know about bank originated mortgage loans.
No cost mortgage loans come with above market interest rates to cover the lender’s origination fees and sometimes closing costs. If you read the fine print on Bank of America’s offer they say traditional closing costs still apply; however you will not pay the 1% fee typically charged by the company originating your loan.
The tradeoff is that you accept a higher than market mortgage rate for your loan. Remember the saying “There is nothing new under the sun?” Mortgage lenders have been running scams like this for years only they have a different name for it. When you take out a mortgage from anywhere other than a bank this markup is called Yield Spread Premium.
Mortgage companies and brokers mark up your interest rate because wholesale lenders pay a premium for loans with above market interest rates. They do this because mortgages with above market rates bring higher profits when the loans are sold to investors on the secondary market. Banks charge customers above market rates for the same reason; the difference with a bank is that there is no wholesaler involved with the transaction, only the bank.
Another problem with bank originated mortgage loans is that banks are exempt from the Real Estate Settlement Procedures Act that required lenders to disclose their markup and profit margin on your loan. The Banking Lobby spent millions of dollars romancing Congress to have the law changed so that they’re exempt. (The Republic is beautiful thing isn’t it?) This alone should leave a bad taste in your mouth and is reason enough never to refinance your mortgage with a bank. Bank mortgage rate sheets have this markup, called Service Release Premium, built into them and this should convince you to avoid your bank altogether.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
