No Loans Cost Mortgage:
What is a no Loan Cost mortgage?
A "True No Loan Cost Mortgage" is when the Borrower pays $0.00 in Loan Cost less the lender's credit. These are defined as cost that are associated in getting the mortgage only. These Loan Cost will be paid by the Lender/Broker credit at closing. Loan Cost are classified into three groups:
1. Lender/Broker Fees: Origination, Processing, Admin., Credit Report, Underwriting, Tax Service, Wire, and Flood. All these fees are controlled by the lender/broker.
2. Title Fees: Closing Fee, Title Insurance, Endorsements, Reconveyance, Recording, Processing, Doc Prep., City/County/State Stamps Fee (Florida only), and other misc. fees. These are third party fees. The borrower may choose the title company for closing.
3. Appraisal: The borrower may not choose the appraiser. Under the federal Safe Act of 2008 the appraiser is picked by the AMC (Appraisal Management Company) when the appraisal is ordered by the Broker. If this is a purchase the borrower should also have the home inspection completed before the appraisal is ordered. These are third party fees.
Other costs listed on the Closing Disclosure (CD) at closing are "Prepaid Items" and "Reserves". These are Hazard Insurance Premium, Property Taxes, and Prepaid Interest. These are not Loan Cost but are called closing cost. These cost are part of the settlement charges on the CD Settlement tatement.
Therefore on a True No Fee/Cost Loan the Lender will give a Lender/Broker Credit which will be applied to the total cost of the Lender/Broker, Title, and Appraisal Fees. For example if the three groups total $4,500.00 for Closing Cost on the HUD-1, you should also see the Lender/Broker credit for $4,500.00 on the HUD to offset the closing cost.
The Big Lie in the mortgage industry is when the Loan Officer adds your closing cost to the loan and tells you it is a No Fee/Cost Loan. This is not true. You are still paying the closing cost over the life of the loan; you just did not have to use any out-of-pocket cash to pay your closing cost at closing.
Is it right for me?
Each case is unique. As a general rule, when rates are up in the Spring and Summer I may recommend a No Cost or Low Cost Loan to a Borrower and refinance them in the Winter when rates go down. For example a client of mine wanted a 30 year fixed at 6.25% for a purchase in July of 2006. At that point in time I would have to buy down to get this rate, therefore his closing cost would have been many thousands of dollars. I recommended a No Cost Loan at a rate of 6.75% being confident the rates what drop in the winter. In November 2006 I refinanced his loan at 6.25% with another No Cost Loan. He could have paid some closing cost and have a rate at 5.875%, but he chose the 6.25% (which he originally wanted) and save thousands of dollars again. Later in Jan 2008 he did another No Cost Loan and got a 5.625% 30 year fixed. Finally he did another no cost loan in 2012 and got a 3.25% on a 30 year fixed. Wow!!!! He is a another satisfied customer.
Another good case for a No Cost Loan is when the buyer of a home only keeps the house between 1 and 5 years. These loans should always be a no Loan Cost mortgage or a very low Loan Cost.
The last case is when the Borrower has an ARM at a high rate or a fixed at a high rate. For example if you have a 30 year fixed at 5.25% and you can get a No Cost Loan at a 30 year fixed at 4.875% with a no pre-payment penalty (PPP) you should take it. If rate go down some more do another No Cost Loan. I have had many clients that did multiple No Cost Loans from a range of 6.75% down to 3.25% on a 30 year fixed with no PPP.
We also offer mortgage consulting for those who are looking for a mortgage company. We will be your "advocate" to help protect you in a "bait and switch situation" which could save you thousands of dollars. We do this for free.
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