The biggest no-brainer ?

The Truth About “No Closing Cost” Loans

A hot topic today is the “no closing cost” loan.  The consumer is bombarded in the media today about the evils of “closing costs” and why you should not pay them.  Some even advertise that if you do pay closing costs, that someone has taken advantage of you.  Some advertise that they will close your loan for free…no closing costs.

From a marketing standpoint, they are trying to drive customers to their company.  They know that most people don’t have an in depth knowledge of how the mortgage financing industry operates.  If you can get a loan without “paying” closing costs, why would you get a mortgage loan from anyone else?

Here is how I answer my loan customers and my students in the State licensing classes that I teach.  First of all, you probably already know that there is “no free lunch” in the mortgage business.  You wanted to believe it, but, in your heart you really knew it didn’t exist.  Loan officers and mortgage companies must operate at a profit or they will be out of business.  So what is all the hype?

First of all let’s define closing costs.  These are fees charged for services performed and other costs of the transaction.  Some of the more common ones are Origination Fee (paid to the originating mortgage company), attorney fee (paid to the closing attorney), Georgia Intangible Tax (paid to the Clerk of Superior Court), underwriting fee (paid to the lending company), appraisal fee (paid to the appraiser), credit report fee (paid to the credit bureau), recording fee (paid to the Clerk of Superior Court) and the list goes on and on. 

Sometimes we hear the term “junk fees” when listing all of the closing costs associated with a mortgage loan closing.  It is easy to understand why they are called junk fees because the list seems endless.  However, every fee has a purpose and disclosing every fee is required by RESPA, the Real Estate Settlement Procedures Act.  This particular regulation, known as Regulation X was enacted to protect the interests of the consumer.  Every fee must be clearly disclosed to comply with this regulation. I have even had customers ask me if I pay the same fees that they do.  My answer is, “Yes.”  I pay the same fees except the Origination Fee.

Realizing that there are inherent costs in closing a mortgage loan, how can someone offer to close your loan for “free?”  The answer is quite simple.  In order to offer you a “no closing cost” loan, the mortgage company must charge a “premium” over and above the market rate to cover these actual costs.  Therefore, if you want the lowest rate available, you must pay the “normal” closing costs to get that rate.  If you want a “no closing costs” loan, then you will pay a higher than market interest rate. 

If you decide on a “no closing cost” loan, you will be paying for your closing costs over the next 30 years.  You are paying closing costs each month in the form of a higher than market interest rate on your loan.

This same explanation applies to the mortgage company that claims they have the “lowest closing costs in town.”  They can adjust your closing costs to make them lower by charging a higher than market interest rate. 

Would you like to know when paying a higher interest rate and “no closing costs” might be beneficial to you?  Try to think of a mortgage loan as a tool to reach your financial objectives. This will be a future topic. 

Gary B. Seney, president and owner of GBS Financial Corporation, is a licensed mortgage broker in Georgia.  Gary has been involved in mortgage lending for 30 years.  He can be reached at 770-304-9867 or seneyloan@aol.com.