Some of these radio ads I hear for mortgage rates and mortgage offers just make me laugh.
I worked as a loan officer for 5 years so I know the reality behind the sneaky little marketing tricks mortgage companies try to pull on radio listeners every day.
Here is one for you…
“We will pay all your closing cost for you. If you come in with a 2 hundred thousand dollar loan, you will leave with a 2 hundred thousand dollar loan.”
Now here is the truth.
Yes mortgage companies can pay all the closing costs on your loan for you, but it sure is not coming out of there “generous” pockets. No no… YOU will be the one footing this bill.
Just like pretty much everything else in life this offer IS too good to be true.
Here is how they do it.
When a mortgage broker chooses a bank to fund the refinance or purchase that you are doing, the bank will actually pay the broker for that business and if they offer you a higher interest rate. They do this through something called Yield Spread Premium or YSP. (see our Mortgage Help for a more detailed explanation of YSP).
If the base rate for the day is 4% the broker could tell you that the rate is 4.25% today and the bank would pay them say 1% of the loan amount to lock at the higher rate. YSP is not the tricky marketing tactic. YSP is a normal part of loans that is fully disclosed and you can learn to use YSP to your advantage.
The problem lies in the fact that all a “We will pay all your closing cost for you” loan is that it is a loan with a much higher interest rate so that the YSP is greater. Then the mortgage broker uses the YSP money to pay the closing costs. But remember the mortgage brokers are in it to make money so they will also be sure to include enough left over for them to make money, this only makes your rate even higher.
These types of loans only leave you with a much higher interest rate than you could have gotten.
This loan will work in one situation.
This loan will work if you are planing on being in the loan short term. If you stay in the loan for just a few years the higher interest rate payments will catch up and eventually overtake the amount you saved by doing a no closing cost loan.
Since it is meant to be a short term loan you should look into a 5/1 Adjustable Rate Mortgage. This will save you more money because the interest rate will be lower.
Now you know.
So now you know the how the “We’ll pay the closing cost for you” loans work. Do not be fooled into thinking they are something greater then they actually are.
If you are looking for a stable fixed mortgage find a bank or broker with more straight forward, honest advertising. Or even better, ask your friends who they recommend.