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Author: Rudy Sanchez
You see them everywhere. Your credit union has them. The local bank as well. In fact, if you turn your radio on right now there is a better-than-average chance some lunatic is screaming about how, if you call now, you'll get a loan "with no points and no fees of any kind!"
Jumpin' Jehosaphat! A free loan! Should you do as the man says and call? After all, it's free right? It must be good, right? This man sounds so excited, so eager to please and help; it must be the deal of a lifetime! How do they do it? The answer to that question is simple and will be explained as you read on.
You see, I despise being the bearer of bad news but I have a revelation: There is no such thing as a free loan. Free loans just do not exist, and if they did they would spend almost all of their time having lunch with Santa Claus and Rumpelstiltskin rather than fall so easily into your lap. I am afraid that mortgage brokers, bankers, credit unions, and loan officers do not work for free. Instead, they would rather advertise a "no points, no fees" loan and hope that you take the bait.
"What bait?" you ask. Allow me to explain. Your loan consists of 2 parts that your broker, banker, credit union, or loan officer can make money on. These 2 parts are called "the front" and "the back". This is where it gets really good. We will start with "the front".
The "front" of your loan consists of all the fees involved in making your loan happen. Most of these fees, while not pleasant to pay, are legitimate fees and must be paid by someone. They include title insurance, escrow fees, notary fees, recording fees, and taxes and insurance reserves; these are paid to third parties for their services and are not paid to your lender or broker. Other fees such as loan origination, processing, underwriting, administrative, and application fees are almost solely at the discretion of your banker, broker, credit union, or loan officer and on a loan of $300,000 will usually total 2 "points" or $6,000.
The fees on the "front" of your mortgage must be disclosed and shown to you in writing. So remember title, escrow, notary fees, and recording fees are legitimate fees and can usually total approximately $2,000 on a $300,000 loan in California, for example. Taxes and insurance reserves can vary significantly, you should usually plan on paying 6 months of each to start your impound account, so if you pay $200/mo for taxes multiply $200 by 6 months and that is $1200. If you pay $100/mo for homeowner's insurance times 6 months is another $600. No one can pay these but you and they are never included in the "no points, no fees" loans. That leaves us with $2000 paid to third parties, and $6000 paid to your broker, banker, credit union, or loan officer.
So why do lenders pay the $2000 in third party "fees" for you and then also waive their "points" of $6000, creating the "no points, no fees" loan? The answer lies in "the back" of your loan.
The "back" of your loan is basically your interest rate. You see there is a wholesale interest rate and then there is your interest rate. Just like anything else sold, interest rates are marked up and sold for a profit. Take blue jeans for example. When you go to your favorite store and buy a pair of jeans for $50, you are paying the retail price. That store may have paid as little as $12 for those jeans, they then mark them up to $50 and sell them to make a profit. Interest rates are no different. Big banks and lending institutions give smaller "direct lenders" and "brokers" wholesale interest rates and then pay them commissions based on how high they can mark up that rate.
For example, on the same $300,000 loan in CA, the big banks may give the smaller lender a wholesale rate of 5.25%, but will pay them 3 points to sell you a 6.875%. 3 points on a $300,000 loan is $9000. So, by paying your title, escrow, etc. fees of $2000 and "waiving" their 2 points you would normally see on the "front" of your loan, it appears you are getting a free loan. But by "marking up" your interest rate, even after paying your $2000 in title, escrow, etc, they will make $7000. In addition, you will pay significantly more over the life of your loan at that higher interest rate.
You see they will gladly pay your small third party fees, then pretend to take away all of their normal fees, in order to cash in on that higher interest rate and net that $7000 payday. And don't think that by dealing directly with your bank or credit union it will be any different, they raise your rate just the same in order to sell your loan over and over again, and your loan at 6.875% it is much more valuable on the secondary market than at 5.25%. And when they do this you usually have no idea what is going on, just like you usually have no idea what your favorite store paid for that $50 pair of jeans.
Keywords: No Points No Fee Mortgage No Points No Fees Mortgage
No Credit
Checks - No Up Front Fees - No Obligation
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